By Nushaiba Iqbal
Oct 23 (Reuters) - The Bank of Canada will raise its overnight rate by 25 basis points to 2.50% on October 28 and follow with one more hike by the end of March to pre-empt any further rise in inflation expectations, according to a majority of economists polled by Reuters.
Inflation rose to 3.1% in September, only barely overshooting the BoC's target range of 1% to 3%. But the central bank's latest business outlook survey showed sharply rising inflation expectations in the run-up to a recent
breakdown in trade talks with the United States, Canada's main export destination.
Quarterly inflation forecasts from the bank, also due next week, are likely to be revised higher, BoC Governor Tiff Macklem told reporters in remarks Saturday that markets interpreted as a hint a rate rise is coming.
Interest rate futures have moved from pricing in a 30% chance of a rate hike in October to around a three-in-four likelihood. Many economists this week changed their view from a hold to a hike, citing those remarks from Macklem.
"What changed the tone in the governor's public comments on the weekend and what changed our view on Monday is the same source, and that is the responses from the BoC's business outlook and consumer surveys," said Royce Mendes, managing director and head of macro strategy at Desjardins.
"So presumably the governor had seen the results before they were published more broadly on Monday. And I would assume that informed his public commentary," Mendes said. "The survey responses...suggest there are more serious inflationary pressures coming."
Nineteen of 34 economists surveyed in the October 21-23 poll, or 56% of them, said the BoC will hike its overnight rate by a quarter percentage point to 2.50%, its first move in a year.
This is a clear reversal from the previous poll, when 80% of respondents forecast the bank would hold its rate at 2.25% until the end of 2026, and two-thirds of them forecast a hold until the end of March 2027.
Those economists who forecast no move next week mainly cited a weak economy and subdued inflation pressures despite soaring oil prices, which hit $117 a barrel for the first time since May on Friday.
Sixteen of 29 respondents, a 55% majority, also forecast one more rise before March 2027, after which policymakers would hold the overnight rate at 2.75%, poll medians showed. If correct, it will be the shortest BoC policy tightening campaign in 30 years.
But even a short series of hikes would bring the BoC into a widening group of central banks that have opted for tighter monetary policy in response to persistent inflation emerging as a result of the US-led war with Iran that began in February.
Among major central banks, only the BoC and the Bank of England — which is widely expected to raise rates at its early November meeting — have not yet begun to raise rates.
But many say the BoC will need to be measured with the pace of rate increases given other risks to the economy.
Benjamin Reitzes, Canadian rates and macro strategist at BMO, said: "They'd rather make the mistake of hiking a little bit too early, which means maybe they have to hike a little bit less at the end of the day than falling behind the curve, which is what happened in 2021-2022, and they don't want to repeat that mistake.”
Economic growth likely slowed to 1.9% last quarter from 3.3% in Q2 and is forecast at 1.3% in the current one before accelerating next year, poll medians showed. The economy will grow 1.0% in 2026 and 1.7% in 2027, the survey found.
Inflation will average 2.8% for 2026 as a whole, falling to 2.3% in 2027, poll medians showed.
(Other stories from the Reuters global economic poll)
(Polling and reporting by Nushaiba IqbalAdditional polling by Shaloo SrivastavaEditing by Ross Finley)
