The Bank of Canada raised its policy rate by 25 basis points on Wednesday to curb inflation. This action represents the first increase in more than three years, primarily targeting the impact of global energy prices.

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A 375-day hiatus ends as energy costs spike

By raising the policy rate for the first time in 375 days, the Bank of Canada is attempting to get ahead of a potential inflationary spiral. According to the source, Governor Tiff Macklem indicated that this move is designed to manage the expectations of consumers who might increase spending in anticipation of higher future costs. the central bank's October Monetary Policy Report specifically flagged a persistent supply-shock in energy markets as a primary risk that could bleed into other economic sectors.

This shift toward a hawkish stance suggests that the Bank of Canada views global energy volatility as a more immediate threat than domestic stagnation. By signaling a commitment to price stability now, the institution hopes to prevent a cycle of price increases from becoming embedded in the broader Canadian economy.

The tension between a 25-basis-point hike and 68,300 lost jobs

The decision to tighten monetary policy comes at a precarious moment for the Canadian labor market.. As the report says, Statistics Canada data reveals that the economy shed 68,300 jobs in September, a downturn that erased previous gains made earlier in the year. This creates a difficult balancing act for the Bank of Canada: raising rates to fight inflation while the economy is already showing signs of sluggishness.

Market observers are divided on whether this timing is correct. Earl Davis, head of fixed-income and money markets at BMO Global Asset Management, suggested that while the hike aligns with expectations, it may be premature given the current volatility in equity markets. The central bank is essentially betting that the risk of runaway inflation outweighs the risk of further job losses.

Doug Ford's warning on the Strait of Hormuz and tariffs

The political reaction highlights a disconnect between monetary policy and the geopolitical realities affecting Canadian businesses. Ontario Premier Doug Ford argued that increasing the bank rate will raise the cost of living for families without addressing the root causes of inflation. Specifically, Ford noted that higher domestic rates do nothing to lower oil transport costs through the Strait of Hormuz or alleviate the burden of tariffs on Canadian companies.

Ford's critique underscores a fundamental tension: the Bank of Canada can control the cost of borrowing, but it has no influence over the global supply constraints and trade dynamics that are driving up the price of energy and imported goods.

Will the 2027 tightening cycle materialize?

The current hike may be the opening salvo in a multi-year tightening phase. Tu Nguyen, an economist at RSM Canada,noted that this move could signal further increases as early as December and potentially extending into 2027 to match a tightening global financial environment. This suggests that the Bank of Canada is preparing for a long-term battle against inflation rather than a short-term correction.

However, there is a possibility that the pace of these hikes could slow. Earl Davis of BMO Global Asset Management pointed out that market expectations for total hikes might be revised down from over 100 basis points to approximately 75 basis points. A key unknown remains whether the Bank of Canada will pivot if the job losses reported by Statistics Canada accelerate in the coming months,or if they will remain committed to the 2027 horizon regardless of labor market volatility.