Bank of Canada's October Rate Decision Will Be Close, but Markets Overpricing 2027 Hikes, Capital Economics Says

12:02 PM EDT, 09/17/2026 (MT Newswires) -- The Bank of Canada is unlikely to increase rates at its October policy meeting unless September's consumer price index unexpectedly exceeds expectations or oil prices climb sharply, according to Capital Economics in a Thursday note. Although higher oil prices benefit Canada overall, market expectations of 125 basis points of hikes by the end of 2027 appear to be excessive, said Capital Economics. BoC Governor Tiff Macklem has stated that the October Monetary Policy Report, to be released with the monetary decision on Oct. 29, will inform decision-making, with inflation forecasts being a crucial factor. Although there are some indications of rising near-term inflation expectations, core inflation pressures remain subdued. As a result, Capital Economics anticipates no interest rate hike this October, but it will be a narrow call. Even if Canada's central bank hikes, the markets' pricing suggests more tightening than justified, as a 100bps increase to reach a neutral policy range appears more appropriate given current conditions, added Capital Economics. "Once factoring in a longer drag on demand from uncertainty around the US-Canada trading relationship, we suspect the Bank will hike by less than that," wrote Capital Economics Chief North America Economist Stephen Brown.