The Federal Open Market Committee, the Bank of Canada’s equivalent of the Governing Council, announced last week that it would raise the overnight federal funds rate by 25 basis points to 3.75%-to-4.0%. The key question is whether it’s a one-off or the start of something deeper and longer.

We suspect the latter. The Fed has more work to do. Resilient U.S. growth, easy financial conditions, and persistent inflation pressures point to another hike in December and further tightening in the first half of 2027.

Under Kevin Warsh, the Fed appears increasingly willing to base policy on observable outcomes rather than uncertain model estimates. US growth remains above trend, unemployment is low, initial unemployment insurance claims are below 200,000, financial conditions remain supportive, capital spending is booming, and inflation has exceeded its 2% target for five and a half years. These conditions explain the unanimous hike and the signal of another hike before year-end, while reinforcing perceptions of the Fed’s political independence and credibility as the Fed and Treasury pull in opposite directions.

The Iran war has been more than an energy shock; it is another global supply-chain disruption. Although far smaller than COVID, it is still significant—and its timing could hardly be worse after years of central-bank inflation overshoots.

Commodity prices are surging, suggesting a broader and more powerful shock than the initial response to Russia’s 2022 invasion of Ukraine. Metal demand, energy demand, and agricultural prices have all increased, contributing supply strain, resulting the overall inflation.

So where does this lead the Bank of Canada when they next meet on October 28? I am sorry to say that the odds favour a rate hike, although it is a close call. I would assign roughly a 60% probability to a hike and a 40% chance of another (the eighth) rate hold. Markets are taking a similar view. As of September 21, CORRA (Canadian Overnight Repo Rate Average)- based pricing implies about a 63% chance of an October hike. The Fed’s rate hike reinforces a broader global tightening cycle.

Canadian headline inflation, though below the US, is still running at a 3% pace. High oil and refined-product prices are lasting longer than the Bank of Canada expected. The longer they remain elevated, the greater the danger that transportation, food and other business costs begin spreading into broader inflation. Canadian counter-tariffs will add some upward pressure to costs, even if the initial effect is modest. Q2 growth was a surprisingly strong 3.3% annualized, with gains in consumption, exports and business investment. Waiting until December could allow inflation expectations and pricing behaviour to become less well anchored.

The Bank’s September deliberations were quite revealing: The Governing Council explicitly said that if energy inflation began spreading into other CPI components, “it could require a monetary policy response.”

Bottom Line

The Bank will not hike simply because the Fed did. It will hike if the October Monetary Policy Report concludes that high energy prices and tariffs are beginning to produce persistent, broader inflation.

My call today: October 28: 25-basis-point hike to 2.50%, accompanied by cautious language and no commitment to a continuing series of hikes.

The decisive evidence will be the next two CPI reports—especially CPI excluding gasoline, core measures and services inflation—along with September employment, wage growth and the Bank’s revised estimate of the output gap. A further weak employment report combined with core inflation remaining near 2% would probably produce another hold.