Manulife sees Bank of Canada rate hike next month as inflation pressures build

The Bank of Canada is likely to raise interest rates at its next two meetings as the Middle East conflict creates the risk of broader price pressures, a senior macro strategist at Manulife said. 

It’s a change from the firm’s longstanding view that the central bank would remain on hold through the end of this year. Its base case had been for rate hikes to begin in mid-2027, but “inflation dynamics are changing,” strategist Dominique Lapointe wrote in a report to investors.

Core measures of inflation “have grown close to 3% month-over-month annualized for two consecutive months,” Lapointe said. “While this momentum cannot be tied to Iran-related supply chains, the prolonged state of the conflict makes it increasingly likely that so-called ‘second-round’ effects will eventually show up in core goods prices.”

Economists in a new Bloomberg survey are boosting their forecasts for inflation, now saying it won’t return to the Bank of Canada’s 2% target until the third quarter of next year. Analysts see the consumer price index averaging 3% over the next six months, according to the median forecast, which is 0.6 percentage points higher than in last month’s survey.

That’s being reflected in the bond market, where the yield on benchmark two-year Canada notes has jumped more than 30 basis points this month — closing at 3.426% on Thursday, the highest since July 2024. 

In his report, Lapointe also pointed to the low likelihood of further escalation by Canada in the trade war with the U.S., which he said is “likely to be reassuring” to the central bank. 

Higher tariffs and trade barriers have created hardship for specific Canadian industries such as steel and autos. But they haven’t resulted in a recession or a broad rise in unemployment, and economic growth bounced back sharply in the second quarter. 

“Because monetary policy cannot target specific industries (that is the government’s job), the Governing Council is likely to conclude that trade tensions do not offset inflation risks in the near term and that slightly higher rates are required,” Lapointe wrote. 

The Bank of Canada’s benchmark overnight rate has stood at 2.25% since October 2025. 

Source: Canadian Mortgage Trends