Bank of Canada Hike Odds Hold at 18bps Despite Soft CPI

Scotiabank expects the Bank of Canada to raise its policy rate by 25 basis points at its meeting on Wednesday, 28 October 2026, even after September consumer prices came in softer than forecast. Markets were pricing about 18 basis points of tightening after the CPI release, unchanged from levels set following Governor Tiff Macklem's weekend remarks. Headline inflation rose 3.1% year over year in September, up from 3.0% in August and a tick below forecasts, leaving it at the top of the central bank's 1% to 3% target range.

Context — why the 28 October decision matters now

September's inflation report handed the Bank of Canada a softer headline to point to, but Scotiabank argues that summer travel coming off is no reason to hold rates while forward-looking risks keep building. The bank's case rests on the gap between the backward-looking data and the risks it says are stacking up ahead of the decision.

The report's own comparison is with August, when headline inflation ran at 3.0%. September's 3.1% print therefore marks a further drift higher, not a cooling, and it sits at the ceiling of the target range rather than inside it.

Scotiabank also points to a shift in tone from Governor Tiff Macklem, who it says has turned toward forward-looking inflation risks rather than backward-looking data. The central bank dropped its description of the policy rate as appropriate at its previous meeting, which Scotiabank reads as a warning.

Canada's two-year bonds have been the weakest-performing front end among major markets, reflecting that shift in pricing. The bank said policy sits at the lower bound of neutral and is negative in real terms, and that central bank staff have historically tended to underestimate inflation at turning points.

Business and consumer surveys from the central bank, along with a vote in Alberta, are still due before the decision. Those releases sit between the CPI print and the rate announcement, giving policymakers additional inputs that markets have not yet seen.

Data — what the September numbers show

Headline CPI rose 3.1% from a year earlier in September, up from 3.0% in August and a tick below forecasts. Core measures eased in the month, but Scotiabank said upward revisions to earlier data and the smoothed trend still point to persistent pressure.

Its preferred three-month averages of the central bank's core measures are running at around 2.6% to 2.7% on an annualised basis, above the midpoint of the 1% to 3% band.

Metric	August	September
Headline CPI y/y	3.0%	3.1%
3m annualised core (Scotiabank estimate)	—	~2.6% to 2.7%

Scotiabank attributed much of September's softness to a sharp drop in travel prices as the summer holiday season ended. Travel services prices fell by roughly a quarter on an annualised basis, and car rental prices by close to 40%, a fall far larger than the usual seasonal pattern.

The bank said such moves warrant caution over data quality. Excluding travel, it said core inflation would have been firmer and more broadly based, with almost 60% of the CPI basket rising by 2% or more from a year earlier.

Analysis — what it means for the loonie and front-end yields

With a hike largely priced, Scotiabank said failing to deliver would loosen financial conditions in a way that would be hard to justify. That framing places the burden of proof on holding rather than hiking, and it explains why the two-year sector has led the repricing.

Oil is central to the outlook. Scotiabank flags the risk of an escalation in the Iran war after the US midterms, which could push energy and commodity prices higher and add to Canadian inflation pressure. Higher crude would normally support the Canadian dollar, but it would also strengthen the case for further tightening.

The bank also cited another expansionary federal budget among the pressures monetary policy may need to offset as spare capacity closes. Energy producers and commodity-linked equities are the sectors most directly exposed to that channel, since a crude move feeds both the inflation prints the central bank watches and the earnings base of the sector.

The counter-argument sits in the September data itself. Travel services and car rental prices fell far more than the usual seasonal pattern, and if those declines reflect genuine demand weakness rather than a measurement quirk, the underlying inflation picture is cooler than Scotiabank's smoothed averages suggest. The bank acknowledged the data quality concern but argued a slump in travel spending is not a reason to keep rates on hold.

Positioning reflects the split. Markets hold roughly 18 basis points of tightening priced, meaning a hike is the base case but not fully locked in, leaving room for the Canadian dollar and front-end yields to move on both the decision and the guidance that accompanies it.

Outlook — what to watch next

The central bank's business and consumer surveys and the Alberta vote are the remaining inputs before the 28 October decision. Each can shift the pricing that has held near 18 basis points since the CPI release.

If the Bank of Canada holds instead, the loonie would likely weaken, and markets could read the pause as a signal that policymakers are prepared to tolerate inflation near the top of the target range. That reaction function is the key variable for front-end positioning.

Beyond the decision, the report points to Iran war escalation risk after the US midterms, higher energy and commodity prices, and another expansionary federal budget as the catalysts that would keep inflation pressure building into the following meetings. Canada's two-year sector remains the front end to watch, given it has led the move among major markets.

Frequently Asked Questions

What does a 25 basis point Bank of Canada hike mean for mortgage holders?

A quarter-point increase raises the policy rate that feeds through to variable-rate and short-term borrowing costs. The report does not give the current policy rate level or specify mortgage pricing, so the precise monthly payment impact cannot be calculated from the figures provided. What the report does establish is that policy sits at the lower bound of neutral and is negative in real terms, meaning borrowing costs remain below inflation on that measure.

Why did markets keep pricing 18 basis points after September CPI came in soft?

Pricing held at about 18 basis points of tightening after the CPI release, unchanged from levels set after Governor Tiff Macklem's weekend remarks. Scotiabank attributed September's softness to a sharp drop in travel services and car rental prices that exceeded the usual seasonal pattern, and argued a slump in travel spending is not a reason to keep rates on hold. Almost 60% of the CPI basket still rose 2% or more year over year.

What happens to the Canadian dollar if the Bank of Canada holds rates?

If the central bank holds instead of hiking, the loonie would likely weaken, and markets could read the pause as a signal that policymakers are prepared to tolerate inflation near the top of the target range. Scotiabank said that with a hike largely priced, failing to deliver would loosen financial conditions in a way that would be hard to justify. Canada's two-year bonds have been the weakest front end among major markets.

Bottom Line

Scotiabank expects a 25 basis point hike on 28 October, with markets pricing 18 basis points and a hold carrying clear loonie downside.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.