The Bank of Canada announces its rate decision on October 28 with the overnight rate at 2.25%, where it has stood since October 29, 2025 across seven consecutive decisions. On October 19, overnight swaps priced an 87% chance of a quarter-point increase, up from about 30% a week earlier.
The core measures the Bank prefers point the other way. CPI-trim eased to 1.8% in September and CPI-median to 1.9%, both below the 2% target, while headline inflation rose to 3.1% on a 27.8% jump in gasoline prices.
Four signals disagree. Headline inflation says tighten, core inflation says wait, the labour market says ease, and a Federal Reserve that raised rates on September 16 has widened the gap to the Canadian policy rate. The October 28 decision, which comes with a full Monetary Policy Report, is where the Bank must reconcile all four in a single forecast.
What the Core Measures Are Actually Saying
September CPI came in at 3.1%, below the 3.2% consensus and 0.1 point above August. Excluding gasoline, prices rose 2.2%, down from 2.4%. Energy overall rose 19.0% and gasoline 27.8%, which accounts for the distance between the headline and everything else.
The measures designed to look through that distance moved down. CPI-trim eased to 1.8% from 1.9%, CPI-median to 1.9% from 2.0%, and CPI-common to 2.4% from 2.6%. Shelter costs rose 1.8% and food bought in stores rose 1.7%, the smallest annual gain since May 2024.
The reading is that the energy shock is in the headline and has not yet spread through the basket. That is a statement about September, and the Bank forecasts the next several quarters, not the last month.
Why the Bank Still Expects a Higher Forecast
On October 17, Governor Tiff Macklem told reporters he expects the Bank of Canada inflation forecast to go up, with oil far above the level assumed in July, and said there is no resolution in sight for the conflict in the Middle East.
Expectations are the channel that turns an energy shock into a persistent one. In the Bank of Canada consumer survey, five-year inflation expectations rose to 3.91% from 3.39% in the second quarter, matching short-term expectations. In its Business Outlook Survey, roughly half of firms plan to keep passing some or all cost increases on to customers. Most interviews for both surveys were completed before trade talks with the United States collapsed, and the Bank said expectations have risen alongside the tariffs and the rebound in energy.
The Labour Market Argues the Other Way
Canada shed 68,000 jobs in September after losing 42,000 in August, erasing more than half of the 181,000 jobs added between April and July. Unemployment rose to 6.5%. The participation rate fell to 64.8%, its lowest since December 1997 outside 2020.
TD senior economist Andrew Hencic wrote that two months of weak labour data between decisions would pour cold water on calls for near-term hikes. RBC economist Abbey Xu still expects the Bank to hold through 2026 and begin raising in 2027, while Scotiabank firmed up its call for a hike after the CPI release and Manulife forecasts increases in October and December. A recent Bloomberg survey of economists pointed to a hold, which leaves market pricing well ahead of the consensus forecast.
The Fed Has Already Moved
The Federal Reserve raised its target range by 25 basis points to 3.75% to 4.00% on September 16, a unanimous 12 to 0 vote and its first increase in three years. US CPI has since reached 3.7% for September, with gasoline up 34.2% and core inflation at 2.6%.
The Fed funds upper bound has returned to 4.00% while the Bank of Canada target has held at 2.25% since October 2025, leaving a policy rate gap of 1.75 points that matches the widest in the period shown.
The Fed series shows the upper bound of the target range and the Bank of Canada series shows the overnight rate target. The Fed raised on September 16, 2026, and the Bank has held at 2.25% since its cut on October 29, 2025.
Markets put the chance of a further Fed increase on October 28 between 14% and 20%, depending on the source, and a December increase at about 74%, according to prediction-market averages. The Canadian dollar has absorbed some of the divergence, trading near 71 US cents on October 19 and 20.
The Transmission to Fixed Mortgage Rates
Lenders price five-year fixed mortgages off the Government of Canada five-year yield, not the overnight rate. That yield neared 4% on October 5, roughly 100 basis points above its level a year earlier, with nearly 40% of the increase arriving in the past month, according to Bloomberg data cited by Benefits and Pensions Monitor.
Prime-linked and variable borrowing responds to the overnight rate directly, so a hike on October 28 would feed straight into it. Fixed-rate pricing has already moved: on October 19, when the hike odds jumped, the two-year yield rose 14 basis points and the TSX fell 0.7%.
October 28 settles whether the Bank is willing to act on expectations before core inflation confirms them. A hold with a higher forecast would tell markets the Bank is prepared to wait. A hike would tell them expectations are the priority.