Bank of Canada Raises Rates to 2.5% While Fed Holds Steady, Both Signaling Inflation Fight Not Over

The Bank of Canada raised its benchmark overnight rate by 25 basis points to 2.5% on Wednesday, its first hike since July 2023, citing upside inflation risks from higher energy prices. Governor Tiff Macklem told reporters that even with the increase the policy rate remains low enough that it is not restraining growth, while also warning that inflation is looking less likely to be well-contained. Senior Deputy Governor Rogers noted the Governing Council debated two options, as is standard practice, and said there is a strong consensus that the balance of inflation risks has shifted. Economists called for at least one more hike, and CIBC projected a January increase after a December pause. Canadian bond yields climbed in response and the TSX posted modest gains.

Across the border, the Federal Reserve held its benchmark rate steady in the 3.75% to 4% range at the conclusion of its two-day October meeting, pausing after a quarter-point hike in September that was itself the first increase in three years. Markets had priced in less than a 10% chance of a hike, with Polymarket showing a 95% probability of a hold going into the decision. Attention centered on Fed Chair Kevin Warsh's press conference and any signal toward a December move. Goldman Sachs, Deutsche Bank, JPMorgan, Morgan Stanley, and UBS all flagged possible changes to the FOMC statement to emphasize a more timely return to the 2% inflation target. Analysts noted that two or three officials, including Beth Hammack and Lorie Logan, could dissent in favor of a hike. UBS separately forecast two additional Fed hikes by mid-2027.

Equity markets in the U.S. were mixed to modestly higher ahead of the Fed decision, with the S&P 500 up about 0.11% and the Nasdaq 100 up 0.29% intraday. European bourses flatlined, with the STOXX 50 essentially unchanged. The dollar pulled back against major peers ahead of the announcement. Bitcoin options implied volatility stood at 36.1% against 26.9% realized, reflecting elevated uncertainty. Major technology earnings from Alphabet and Microsoft were also due after the close, adding another layer of market focus to an already event-heavy session.