Bank of Canada expected to lift its key rate to 2.5%, its first hike in three years, as oil revives inflation worries

The Bank of Canada is widely expected to raise its benchmark interest rate by 25 basis points to 2.5% on Wednesday^1,7. Such a move would be its first rate increase in three years^4,6, and the first since July 2023⁸.

Most economists are predicting a quarter-percentage-point hike as inflation ticks upward⁵. Persistent inflation is the main reason given for the expected increase⁷. Live coverage of the decision begins at 9:30am Ottawa time, and a speech by Governor Tiff Macklem is also on the agenda².

The expected increase follows a period in which inflation has ticked upward⁵ and oil prices have climbed³. Economists’ forecasts have converged on a single quarter-point step rather than a larger move^5,7.

Why it matters to investors

Oil is at the centre of the case for tightening. The expected hike comes as an oil shock deepens⁶, and Macklem has increasingly emphasised the upside risk that rising oil prices pose to inflation⁶. That framing ties the central bank’s next steps to energy markets rather than to domestic demand alone.

Markets were already adjusting before the announcement. Futures tracking Canada’s blue-chip stocks edged lower on Wednesday as higher oil prices rekindled inflation concerns ahead of the decision³. Hedge funds have ramped up short positions on the Canadian dollar ahead of the meeting⁸.

A move to 2.5% would mark a shift toward tightening in which energy prices play a central role^1,6. It would also end a long period in which the bank held off from increases, with the last hike coming in July 2023⁸.

What to watch

The first test is whether the bank delivers the full 25 basis points that most forecasters expect^5,7, or surprises in either direction. A hike would end a three-year stretch without an increase⁴.

The second is the guidance Macklem gives in his remarks². Investors will look for whether he repeats his emphasis on oil as an upside inflation risk⁶, which would signal whether further increases are under consideration. Any shift in the stated rationale, from persistent inflation in general⁷ to oil prices in particular⁶, would also be read closely by rate markets.

The third is the currency. With hedge funds positioned short on the Canadian dollar going into the meeting⁸, the market reaction to any hawkish or cautious message could be amplified as those positions adjust. Equity futures were already softer before the announcement³.