OTTAWA, Oct 28 (Reuters) - The Bank of Canada is widely expected to increase its benchmark interest rate by 25 basis points to 2.5% on Wednesday, in a move seen by most economists as a protection from a possible broader spillover of energy inflation.
A hike would be the central bank’s first since mid-2023 and its first policy change in almost a year.
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It would likely push up bank lending rates and mortgage costs and could slow economic growth. But many economists say it would help the BoC head off cost pressures that are likely to spread from higher gasoline and diesel prices in the coming months.
Nineteen of 34 economists surveyed by Reuters from October 21 to 23 said the bank will hike its overnight rate by a quarter percentage point to 2.50%. A majority also forecast one more rise before March.
Annual inflation rose to 3.1% in September, driven almost entirely by energy, while core measures, which strip out volatile components, eased below 2%, the midpoint of the bank’s 1% to 3% target range.
National Bank of Canada economists Taylor Schleich and Ethan Currie said in a note that BoC Governor Tiff Macklem was clearly uncomfortable with West Texas Intermediate crude at about $90 a barrel in early September, so a further 10% to 20% rise since then has likely exhausted the central bank’s patience.
They said the BoC has been more concerned about inflation than economic growth, given Macklem has been playing down concerns about US tariffs.
"This all leans toward the BoC delivering its first increase since July 2023," they said.
At IMF meetings earlier this month, Macklem said the BoC was getting wary of sustained higher crude oil prices and the risks that its impact might broaden, signaling that it was razor-focused on its mandate to keep inflation at the midpoint of its target.
Money markets are pricing in a roughly 77% chance of a 25-basis-point hike on October 28, compared to last week when the policy tightening was almost fully priced in.
The BoC will announce its monetary policy decision on Wednesday at 9:45 a.m. ET (1345 GMT). It will also release the quarterly Monetary Policy Report, where it is expected to sharply revise its inflation forecast for the coming year.
In its last report in July, the bank had forecast the consumer price index to be at 2.5% this year and 2% next year. Macklem said earlier this month that substantial revisions were coming.
The US Federal Reserve will also announce its policy decision on Wednesday, when it is largely expected to hold rates steady, after having raised them in September.
Reporting by Promit Mukherjee; Editing by Jonathan Spicer
