Good morning!
The Bank of Canada is no longer comfortable waiting for inflation to settle on its own.
Its first rate hike in more than 3 years comes while the recovery is still fragile - and with a warning that more increases may be needed.
Let’s get into it.
MARKET RUNDOWN
Yesterday’s Close
The BoC’s widely expected 25-bp hike to 2.5% lifted the loonie and Canadian yields, while the Fed held U.S. interest rates steady.
BoC Governor Macklem said further rate increases remained possible but that the Bank would proceed carefully.
Oracle’s forecast of positive free cash flow in the second half of FY2028 helped lift U.S. tech stocks.
Tech and energy lifted the TSX, with oil up 1.8% on renewed supply fears from fighting in Yemen and an unexpected decline in U.S. crude stockpiles.
BRIEF OF THE DAY
Bank of Canada Raises Rates to 2.5% in First Hike Since 2023
The news: The Bank of Canada raised its policy rate by 25 basis points to 2.5% on Wednesday, after a year at 2.25%. Accordingly, Canada’s major banks are raising their prime lending rates to 4.70%, increasing interest costs on loans tied to prime.
What changed: With the Middle East war now in its 8th month, the BoC expects oil and fuel prices to stay elevated longer than it previously assumed. Businesses have absorbed much of the associated increases in transportation and production costs, but the BoC expects more of those costs to reach consumers over the next year. It now forecasts inflation averaging 3.1% in 2027 (up from its 2% forecast made in July), before returning close to its 2% target by mid-2028.
Why it raised rates now: The growth outlook has also improved. Consumer spending has held up, exports have strengthened, and business investment is recovering, with federal investment incentives providing support. In fact, the BoC raised its growth forecasts for 2027 and 2028 to 2% in each year (up from its previous forecasts of 1.8%). Stronger demand would make it easier for companies to pass on higher costs to consumers.
The case for waiting instead of raising: Although September inflation was 3.1%, core measures of underlying price pressures remained healthily near 2%. Additionally, unemployment is around 6.5%, housing remains weak, and new U.S. tariffs are expected to slow growth again this quarter. Economists who favoured holding rates argue that these weaknesses could contain inflation without adding to borrowing costs.
What comes next: Given ongoing macro and geopolitical uncertainty, BoC Governor Tiff Macklem left further rate hikes on the table, but committed to deciding “one meeting at a time.” The next rate decision is on December 9. TD expects one more 25-bp hike, while RBC expects three more - showing how differently forecasters assess the recovery and the risk of broader inflation.
💼 Why this matters: The Bank of Canada cannot lower global oil prices nor dictate the Canada-U.S. trade relationship. Its tool is to slow borrowing and spending, making it harder for businesses to pass higher costs on to customers. That creates a difficult trade-off: put more pressure on a fragile recovery now, or risk needing larger rate increases if inflation spreads. The BoC’s latest rate decision shows it’s more willing to accept the first risk to reduce the second.
HEADLINE RECAP
In Canada
Bank of Canada hikes rate to 2.5% for first time since 2023, says more may be needed (BBG)
Bank of Canada governor warns U.S. deficits are unsustainable, pushing up Canadian borrowing costs (BBG)
Canada not yet in position to reach trade deal with U.S., Carney says (GM)
EU drops “associate membership” language from draft Canada-EU summit declaration (BBG)
Over 80% of surveyed Canadian CEOs back Carney’s economic agenda but question execution (BBG)
Ontario unveils $8B business tax cut to match federal Productivity Mega Deduction (TL)
Alberta’s planned AI data centre boom could leave province short 5,200 construction workers, report says (BK)
BMO, TD, and Scotiabank join RBC in restricting third-party AI agents from accessing their banking systems (BBG)
Bombardier (TSX:BBD.B) signs MOU with UK defence firm BAE Systems to explore next-generation combat aircraft (BBG)
Montréal satellite operator Terrestar signs MOU with UAE’s Space42 and U.S. Viasat to develop shared satellite networks (BBG)
Competition Bureau says Air Canada (TSX:AC) and United Airlines joint venture expansion would raise fares on 8 routes (BBG)
Stelco owner Cleveland-Cliffs says it could recall 175 laid-off workers by Christmas if Canadian steel demand improves (GM)
Alberta tables bill to ban DEI-based hiring across public sector (GM)
DEALS WITH CANADIAN PARTIES
M&A & Investments
Sikumiut Environmental Management: The Newfoundland and Labrador-based environmental consultancy was acquired by True Environmental, a consulting and engineering group backed by Halle Capital.
ECM
Bausch Health (TSX:BHC): The Quebec-based pharmaceutical company authorized up to US$50M in share buybacks through November 2027 to offset dilution from employee stock compensation, with repurchases capped at 5% of outstanding shares.
Battery Mineral Resources (TSXV:BMR): The Vancouver-based copper producer announced plans to raise ~$17M through a non-brokered private placement of 85M shares at $0.20 each, with proceeds supporting its Punitaqui copper mine in Chile; insiders are expected to subscribe for more than 25% of the offering.
Juno Corp.: The Toronto-based mining explorer raised ~$25M through a non-brokered private placement of common and flow-through shares, with proceeds expected to fund its 2027 critical minerals exploration program in Ontario's Ring of Fire region.
DCM & Credit
HIVE Digital Technologies (TSX:HIVE): The digital infrastructure operator secured a US$129M 3-year fixed-rate loan at 9% backed by NVIDIA GPU equipment to finance a US$165M AI computing cluster for its contract with Cohere in Canada.
BAY STREET TRIVIA
Which Canadian company has paid dividends every year since 1829?
FOR THE GROUP CHAT
