The Bank of Canada raised its key interest rate by 25 basis points to 2.5 per cent on Wednesday, blaming higher, more persistent inflation for its first rate hike since 2023.
According to the October Monetary Policy Report, which was also published on Wednesday, inflation is projected to remain above three per cent throughout the rest of 2026 and much of 2027.
The bank revised its projected average inflation rate upward to 2.9 per cent for 2026 — 0.4 percentage points higher than July forecasts — and 3.1 per cent in 2027, 1.1 percentage points higher than the July report. Stubbornly high energy prices and higher non-energy import costs will continue to put pressure on inflation into early 2027 before easing in early 2028, the report said.
The bank’s decision comes following months of elevated inflation. Canada’s inflation rate ticked up to 3.1 per cent in September after holding at three per cent in July and August. Energy prices have been a significant component, rising by around 19 per cent year over year in September.
Core inflation measures have stayed relatively tame at around two per cent, however, which suggest high inflation has been limited to a few components such as gasoline, travel services and intercity transportation.
But the Bank of Canada said cost pressures are building, and pass-through is expected to materialize in the coming months. The bank’s most recent Business Outlook Survey found that roughly half of firms surveyed said they are planning to pass the higher fuel costs onto consumers by the end of the year.
Meanwhile, the central bank bumped up its projections for the Canadian economy.
Real GDP growth is now expected to be around one per cent in 2026, 0.3 percentage points above July forecasts, before strengthening to two per cent in 2027 and 2028 — up 0.2 percentage points from July — as strong consumer spending continues, exports pick up and business investment strengthens.
However, the central bank noted that the inflation and growth outlooks remain fluid due to heightened uncertainty around war in the Middle East and U.S. trade policy.
“Against this backdrop, Governing Council considered two policy options: hold or hike,” Bank of Canada governor Tiff Macklem said in prepared remarks.
“With elevated inflation expected to last longer and the economy showing resilience, Governing Council agreed that risks to inflation had increased and there was less scope for monetary accommodation.”
Wednesday’s hike was widely anticipated by economists, who expected the Bank of Canada to hike rates after Macklem struck a hawkish tone on the sidelines of an International Monetary Fund meeting earlier this month.
But the Bank of Canada governor didn’t say whether additional hikes are coming.
Economists and central bank officials said the neutral rate is around 2.75 per cent.
“Looking ahead, Governing Council agreed we would take future decisions one meeting at a time. There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully,” Macklem concluded.
“The Bank remains committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.”
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Bank of Canada raises interest rate to 2.5% in first hike since 2023
2026-10-28 13:48:10
