The Bank of Canada raised its key interest rate for the first time in more than three years on Wednesday, drawing mixed reaction from experts and lawmakers.
The central bank’s governor, Tiff Macklem, said in remarks Wednesday that elevated global energy prices could soon seep into other parts of the Canadian economy, and the hike was needed to reduce that risk.
Earl Davis, head of fixed income and money markets at BMO Global Asset Management, told BNN Bloomberg following the bank’s decision that Macklem’s comments suggest the bank is “trying to get ahead of the game.”
But a rate hike on its own won’t prevent the knock-on effects of higher oil prices, Davis said.
“That will happen no matter what, but it prevents people from buying ahead of time and controlling inflation,” he said.
“So (Macklem) is trying to get ahead of it, and that seems to be explicitly stated in the statement.”
The bank’s decision to hike comes as Canada’s economy continues to grapple with uncertainty due to shifting geopolitical dynamics and a trading relationship with the U.S. that has fundamentally changed.
Canadian workers have paid the price for the country’s economic sluggishness. Statistics Canada said earlier this month that the economy shed a net 68,300 jobs in September, effectively erasing the employment gains made earlier this year.
‘Pre-emptive hike’
Davis said that according to the Bank of Canada’s October Monetary Policy Report, released Wednesday, the bank has put a renewed emphasis on mitigating the impacts of a “persistent supply shock” in energy markets.
“In layman’s terms, the persistence of how high oil has been, and the price of oil at this level for so long… will impact inflation expectations of consumers for the next six months to a year, which means they will buy more and consume more now to get ahead of inflation,” he said.
“So, we see this hike as a pre-emptive hike.”
Davis said the decision didn’t come as a surprise to him, as the 25-basis-point increase was widely expected, but he added that the move was likely made too early.
“Why we think it’s premature is… last week we had a lot of equity volatility, a lot of risk of market nervousness, which has calmed down this week, but we expect that volatility to return and remain there for the fourth quarter, which adds to uncertainty,” he explained.
RSM Canada economist Tu Nguyen said in an emailed statement to BNN Bloomberg that the bank’s “decidedly hawkish” tone sends a clear message.
“This is the first hike in a hiking cycle. Expect the next rate hike as early as December – with more to follow in 2027,” she said.
“The Bank of Canada won’t be alone in raising rates. Rather, it’s set to be one of several major central banks embarking on a hiking cycle… ahead of tightening global financial conditions in 2027 that could thwart growth.”
‘Silver lining’
Wednesday’s rate hike also comes at a time when many Canadians are struggling with the overall cost of living, and higher interest rates will be an additional challenge, said Ontario Premier Doug Ford in a post to X on Wednesday.
“Higher rates won’t get oil moving through the Strait of Hormuz or lower tariffs on Canadian businesses,” he wrote.
“They will only make life more expensive for Canadian families and workers, punishing them for something they can’t control.”
Davis said that while the Bank of Canada may have moved into a hiking cycle too early, the decision may ultimately have “a silver lining.”
“It may very well be the right thing in hindsight, but because it’s premature, the market was, prior to this, discounting an additional 100-basis-points-plus of hikes, including today’s,” he said.
“We think that will be reduced now to possibly 75, or the market thinking the Bank of Canada will hike less over the coming year because today was a bit premature.”
With files from CP24’s Phil Tsekouras and The Canadian Press
