On the Radar: Where Canadian and US rates go from here

Wednesday’s decisions left Canadian and US rates at different points in the same argument. How long can central banks wait for an energy shock to fade before it starts changing the prices businesses charge and the inflation consumers expect?

The Bank of Canada raised its policy rate by a quarter point to 2.50%. The Fed, having increased rates in September, held at 3.75% to 4.00% on Wednesday afternoon. Neither settled how much more tightening would be needed. A pause in December could still coexist with higher borrowing costs further ahead.

The most revealing part of Canada’s decision was that underlying inflation had not yet moved far from target. Core measures remained near 2%, and September inflation excluding gasoline was 2.2%. The Bank also acknowledged spare capacity in the economy. Those were credible reasons to wait.

What changed was the risk of waiting. Energy costs have stayed high long enough that businesses may no longer be willing to absorb them. Macklem’s concern was that Canadians would first pay more at the pump, then face a second round of increases as transportation and production costs worked through other goods and services.

The new inflation forecast shows why that matters. The Bank now expects inflation to remain at or above 3% through much of 2027, with a return close to 2% only by the middle of 2028. A temporary price shock becomes a harder policy problem when its effects persist long enough to influence pricing decisions across the economy.

A stronger growth outlook also gives the Bank less reason to assume weak demand will contain inflation. It expects new US tariffs to slow activity late this year, followed by a recovery in exports and investment. Further increases would have to balance inflation risks against that recovery.

Macklem left further increases available but committed to deciding one meeting at a time. He also said the rate remained low enough that it was not restraining growth. Wednesday’s move therefore does not establish that policy has done enough.

The Fed’s pause came with a different starting point. It had already raised rates in September, and Kevin Warsh pointed to lower market-based inflation expectations despite persistently expensive energy as an encouraging sign. Waiting gives officials more time to judge whether that response lasts.

But financial conditions becoming tighter does not necessarily mean they are tight enough to control inflation. Warsh made that distinction while the Fed described economic activity as strong. Lisa Cook and Beth Hammack voted for another quarter-point increase, demonstrating that the case for acting immediately remained substantial.

Strong growth alone does not resolve the argument. Productivity gains can allow an economy to expand faster without generating the same price pressure. The question is whether that additional capacity is keeping up with demand. Continued strength in spending alongside persistent underlying inflation would make another increase easier to justify; clearer evidence of cooling inflation would strengthen the case for patience.

Both central banks next decide on December 9. Wednesday’s US futures snapshot assigned an 85% probability to a quarter-point increase, which would take the Fed’s range to 4.00% to 4.25%. That is a market expectation, not a commitment from the Fed.

An independent Canadian forecast put the probability of a December hold at 2.50% at 93%. Other assessments were less confident about a pause, so that figure should not be treated as a consensus. More fundamentally, a December hold says little about where rates could go in 2027.

CIBC and Desjardins both expected Canada to hold in December and raise rates again in January. That sequence fits the Bank’s guidance without requiring an increase at every meeting. The next decision will turn on how the inflation risks develop; the larger question is whether a single increase can contain them.

For Canadian borrowers, a December pause would preserve higher prime-linked variable costs rather than reverse Wednesday’s increase. Five-year fixed terms depend on Canadian funding yields and lender spreads, which can change well before the next policy announcement. US developments influence those yields without passing through mechanically to Canadian mortgage rates. The key is whether investors become more confident that inflation will come down without a prolonged series of further hikes.