Calls increase for Bank of Canada to hike rates in October as global investment bank UBS weighs in

There are growing calls for the Bank of Canada to hike interest rates at its next meeting later this month after seven straight holds as the risks of inflation spreading rise.

“Our baseline now includes one 25-basis-point hike in October and another in January, followed by a prolonged hold once the policy rate reaches the midpoint of the neutral range,” Abigail Watt, an economist at UBS Global Research, said in a note this week.

The Bank of Canada has held its benchmark-setting rate at 2.25 per cent since October 2025, taking rates to the bottom end of its neutral range of 2.25 per cent to 3.25 per cent. Two 25-basis-point hikes would take it to 2.75 per cent, the midpoint.

UBS had previously called for the Bank of Canada to hold rates for the remainder of 2026 and hike next year, but recent statements by the Bank of Canada on inflation convinced it to pull forward its call for hikes.

Bank of Canada governor Tiff Macklem, following the September rate hold, said the risks of inflation rising were increasing and that business seemed to be adapting to pressures from the United States-Canada trade war.

“That shift suggested the Bank of Canada was becoming less willing to look through above-target headline inflation while waiting for clearer evidence of domestic demand pressure,” Watt said.

Inflation in Canada accelerated to three per cent year over year in August, the most recent data available. UBS is calling for inflation of 3.3 per cent when Statistics Canada reports numbers for September on Oct. 19.

Watt said other comments on inflation made by Macklem during a recent speech in Halifax support UBS’s view that the Bank of Canada will want to make “a preemptive adjustment” to hike rates.

But she said the Canadian economy doesn’t need aggressive action on rates.

Recent gross domestic product data for July and an estimate for August suggest the economy grew anywhere from 1.4 per cent to two per cent in the third quarter on an annualized basis. In the second quarter, it expanded 1.2 per cent year over and business investment increased for the first time since the fourth quarter of 2024.

“We doubt the Bank of Canada would want to overly curtail the economy just as it is showing signs of life,” Watt said.

Manulife Financial and Oxford Economics Ltd. have also moved up their calls for rate hikes to be made in October.

Manulife said the Bank of Canada will raise interest rates at its meetings this month and December, citing the Middle East conflict and rising risks of inflation spreading.

It previously expected the central bank to remain on hold through 2026 and to start hiking in mid-2027.

“Inflation dynamics are changing,” Dominique Lapointe, a global-macro strategist, said in a report this week.

Oxford Economics also now expects hikes in October and December after previously calling for rates to stay on hold until the fall of 2027.

“We don’t think that they are going to raise rates further than that,” Michael Davenport, a senior economist at Oxford, said in mid-September. “Our baseline call is that they’ll basically adjust the policy rate back up to a neutral setting.”

Bank of Nova Scotia is also calling for the Bank of Canada to hike rates in October.

• Email: gmvsuhanic@postmedia.com