Oil-driven inflation, a weakening job market and fragile housing complicate brokers’ rate outlook
Oxford Economics now expects the Bank of Canada to raise its key rate by a cumulative 50 basis points by January 2027, about a year earlier than it projected in September, as surging oil prices push inflation higher.
The forecast lands days before the central bank’s Oct. 28 decision, with the overnight rate at 2.25%. Oxford expects 25-basis-point hikes on Oct. 28 and in December, returning the rate to what it estimates is a neutral 2.75%. It does not view the moves as “the start of a tightening cycle.”
Markets have moved toward a hike. A Reuters poll of economists conducted Oct. 21-23 found 19 of 34 (56%) expect a quarter-point increase to 2.50% next week and another by the end of March. Overnight swaps implied about a 75% chance of an October hike, according to Bloomberg data.
Oil lifts headline inflation, not yet core
Consumer prices rose 3.1% year over year in September, up from 3.0% in August, with gasoline up 27.8%, CMP reported. The Bank’s preferred core measures, CPI-trim and CPI-median, averaged 1.9%.
Oxford expects headline inflation in the mid-3% range in late 2026 and early 2027. It assumes Brent crude stays above US$100 a barrel for the next six months. Oil hit $117 a barrel on Oct. 23, Reuters reported.
Governor Tiff Macklem has grown more wary. Speaking at IMF meetings in Bangkok, he warned that “the risk that inflation broadens and becomes more persistent has gone up,” RBC economist Abbey Xu noted.
Others see less urgency. Dominion Lending Centres chief economist Sherry Cooper said last week: “Today’s inflation report reinforces our view that higher gasoline prices temporarily boost headline inflation while further eroding household purchasing power. However, these energy-driven increases, largely tied to geopolitical tensions, are unlikely to trigger a broader resurgence in underlying inflation.”
Oxford, too, expects slack and slower shelter inflation to keep core inflation from rising sharply. Still, it called the October decision “a toss-up” after softer jobs and inflation data, adding: “even if it doesn’t hike in October, we still anticipate it’ll lift the overnight rate by a cumulative 50bps by January.”
Housing and household debt in focus
Statistics Canada said the economy lost 68,000 jobs in September, lifting unemployment to 6.5%. Oxford trimmed its 2027 GDP growth forecast by 0.1 percentage points to 1.3% and left 2026 at 1.0%. It projects the 10-year government bond yield near 4% through 2027, a key input for fixed mortgage pricing.
On housing, the report said: “We expect home sales volumes and prices to slide this fall and into early next year as mortgage rates rise.” It added that elevated debt “will continue to constrain spending by Canadian households and make them vulnerable to job losses, higher interest rates, and a resurgence in oil prices.”
Trade remains a drag. The US imposed 50% tariffs on C$27.6 billion of Canadian goods effective Aug. 22, and Canada countered from Sept. 8, according to a Finance Canada statement.
Oxford warned that if oil prices don’t ease in 2027, the Bank could “hike rates to the top of its neutral range at 3.25%, or even higher into restrictive territory.”
For brokers, the Bank will release updated inflation projections alongside the decision. Variable-rate clients feel any hike through prime, while renewals face fixed pricing set by bond yields. Both groups may need early conversations about payment tolerance and rate holds.
