MediumIV Macro Policy & Sovereign Debt21 October 2026, Wednesday
Odds of a Canadian rate hike jump to 80% in a week
Swaps on 21 October put roughly 80% odds on the Bank of Canada raising its rate from 2.25% to 2.50% on 28 October, up from 30% the previous Friday. The economy shed 68,000 jobs in September.
According to a Hashtag Investing note dated 21 October, overnight swap pricing implies a roughly 80% chance that the Bank of Canada (BoC) raises its policy rate by 25 basis points on 28 October. The previous Friday the probability was about 30%. The BoC has held at 2.25% at every meeting in 2026. On 20 October the Canadian dollar touched 1.403 per US dollar, its strongest intraday level since 22 September.
Expectations are what turned the pricing. Briefs reported on 19 October that five-year inflation expectations in the BoC's consumer survey rose to 3.91%, the highest since the second quarter of 2022. More than 40% of firms facing above-normal cost increases plan to pass them on within 12 months, and about a quarter already have. Headline inflation rose to 3.1% in September, with petrol up 27.8% on the year.
On the other side of the scale is a weakening labour market. The economy lost 42,000 jobs in August and 68,000 in September, and unemployment rose to 6.5%. Core measures are also close to target: CPI-trim at 1.8%, CPI-median at 1.9% and inflation excluding petrol at 2.2%. The BoC will also publish a new Monetary Policy Report on 28 October; Macklem has said he expects to revise the inflation forecast up markedly.
Talay assessment
Bottom line
The BoC faces a classic stagflation dilemma. Employment has lost 110,000 jobs in two months and core inflation is below target, yet five-year expectations, at 3.91%, are the highest since 2022. Markets judge a drifting expectations anchor to matter more than jobs. A hike would be a signal aimed at expectations rather than prices; holding could see the currency and longer-term rates punish the decision.
Likely effects
- Canadian dollarPositiveWeeks
The jump in hike odds from 30% to 80% carried the loonie to 1.403; if the decision disappoints, those gains could vanish quickly.
- Jobs and housingNegative1–6 months
With 110,000 jobs lost in two months, a rate rise adds to indebted households' burden and the risk of pushing unemployment above 6.5%.
- Global tighteningUncertain1–6 months
The Fed and the ECB both hiked in September; a BoC move would confirm that central banks are putting the expectations anchor ahead of growth in the face of the energy shock.
Possibilities, ranked
- 125 basis-point hike on 28 October65%
The BoC lifts the rate to 2.50%, stresses expectations and makes any further move data-dependent.
Watch: The 28 October decision and the inflation forecast in the Monetary Policy Report
- 2Hawkish hold35%
The BoC points to job losses, holds rates and signals the December meeting.
Watch: An explicit signal of a December hike in the statement
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.
Market reaction
Indicators affected
- Hike probability (swaps)▲ ~80%
- Five-year expectations▲ 3.91%
- September employment▼ −68,000
- USD/CAD▼ 1.403