Bank of Canada overreaction?

Rate hike sending the wrong message at the wrong time

Last week, the Bank of Canada (BoC) opted to raise interest rates by 25 basis points¹ while the U.S. Federal Reserve held steady.² Though the BoC’s move was widely expected, we had hoped that they would remain on the sidelines. There are more things to worry about than just inflation, such as the trade situation and a slowing economy. While inflation has ticked higher, we are also coming off of a disappointing jobs number, so we don’t quite understand the BoC’s rush to raise rates at this stage.

Additionally, the BoC is projecting inflation to be much higher next year, and while prices may continue to increase, the Bank’s estimate is higher than others we’re seeing on the street. Given the myriad uncertainties impacting the Canadian economy, one could even have made the case for cutting rates (though that would have been quite bold), so the decision to raise rates at this stage is a bit puzzling. Going forward, we expect this decision to put further pressure on the housing market and the consumer, and increase companies’ debt servicing costs.

The Fed’s decision was a bit more straightforward. They raised rates last month despite trying to find a reason not to; the economy was strong, and inflation was too high, so the decision made sense. Having already made that move, they had the freedom to take a wait-and-see approach this time, and that’s exactly what happened. It is possible the BoC will do the same at its next meeting – though central banks rarely hike interest rates just once in a given cycle.

Bottom line: While inflation remains elevated, we think the Bank of Canada’s decision to raise interest rates sent the wrong message at the wrong time, especially given some of the positive news we’re seeing coming out of recent trade summits.

Technology: AI theme still going strong

Anthropic, in advance of its upcoming initial public offering (IPO), has filled its S-1 – a preliminary prospectus that for the first time gave investors a look at the company’s books.³ In general, Anthropic’s earnings look very strong, highlighting the artificial intelligence (AI) monetization story that we’re seeing across the AI space; Microsoft and Alphabet (Google) are among the companies that also highlighted AI monetization in their recent earnings announcements. For us, this serves as evidence that some AI-related revenue is being crystallized.

At the same time, Google suffered its worst single-day stock drop ever on concerns that AI may be hurting the company’s core search engine business,⁴ while Oracle got a boost from cutting expenses and Meta got hit for increasing expenses.

All together, the AI theme is still going strong, especially with respect to monetization. But with markets examining multiple factors – including growth, revenue, cash flow, and capital expenditures – and rewarding or punishing accordingly, it remains something of a stock-by-stock story.

Taking the pulse of the market, it looks like valuations still have to come down from here, which could add some pressure in the short-term. The fact that AI data centres have become a hot-button issue in the lead-up to the U.S. midterm elections also adds some uncertainty. For Anthropic’s part, the S-1 filing suggests that their momentum remains strong, and we continue to expect significant interest in their IPO.

Post-IPO developments are the real question: If the company’s valuation jumps appreciably, will investors still be willing to buy? It could be a situation similar to SpaceX, whose stock saw an initial spike followed by a steep decline and then a gradual recovery. Timing is important, as currently the AI story is being attacked by investors.

Bottom line: While there are still some clouds hanging over the AI story, light is shining through in the form of AI monetization and the crystallization of AI-related revenue.

Canada: Rising rates pressure consumer

What will the Bank of Canada’s rate hike mean for the Canadian consumer? It’s an important question.

In general, the Canadian economy survived the 2022 rate-increasing cycle without too much damage, though Canadians also benefitted from excess savings from the Covid fallout. Now, on the heels of that cycle, rates are going up again, and we’d expect it to ratchet up pressure on the consumer.

With many Canadians tied to variable-rate mortgages or with fixed-rate mortgages set to renew, higher rates will eat into consumers’ disposable income and further weaken an already-weak housing market. Our assumption is that the BoC is also unlikely to only raise rates once; one rate hike is unlikely to accomplish much, so more increases can be expected down the road even if the Bank does pause at its next meeting.

Canadians’ net worth is tied to housing prices, so a tumble there would be significant. And if U.S.-Canada trade tensions persist, companies could exit the country, causing job losses and adding further pressure to the housing market. Declining immigration also reduces demand. Rents are likely to come down, but that is about the only positive we can see.

Bottom line: The BoC’s rate increase is likely to increase pressure on the housing market and the Canadian consumer, especially in light of ongoing trade-related headwinds.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Trick or treat? Stubborn risks meet market optimism.

Sadiq Adatia, CFA, FSA, FCIA, is Chief Investment Officer, BMO Global Asset Management.

Visit the BMO ETF Market Insights Page for ETF trends, educational insights, and strategies.

Notes

1. Ariel Rabinovitch, “Bank of Canada says its interest rate hike is ‘not going to feel good’,” Global News, October 28, 2026.

2. Kylie MacLellan, Vanessa Balintec, and Lioman Lima, “Fed leaves rates unchanged to wait for more data on inflation – as it happened,” Reuters, October 29, 2026.

3. Kai Nicol-Schwarz, “The big questions remaining after Anthropic’s blockbuster IPO prospectus,” CNBC, October 30, 2026.

4. Jared Blikre, “Alphabet loses $482 billion in market value, the biggest drop in its history,” Yahoo Finance, October 29, 2026.

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