Bank of Canada raises rate by 25 basis points to 2.5% as inflation expectations rise
Key Facts
The Bank of Canada on October 28 raised its overnight policy rate by 25 basis points to 2.5%, the first rate change since cutting it in October 2025. It set its bank rate at 2.75% and the deposit rate at 2.45%. The bank said the decision aims to limit the risk that higher energy prices spread to other goods and services. The move came as the bank expects inflation to remain above 3% through most of 2027 before returning close to its 2% target by mid-2028. The Governing Council left the door open to another increase, but said it would act cautiously amid uncertainty.
The bank’s concerns stemmed from persistent energy-related and import price pressures. Inflation has remained around 3% since April, while it stood at 2.2% excluding gasoline in September, according to the bank’s statement. Higher fuel prices added to production and transportation costs as prices for imported industrial and electronic inputs rose. The institution estimated that refining margins added the equivalent of about US$40 a barrel in September, pushing fuel prices above the level explained by crude oil prices alone. It also said disruptions to global energy supplies and higher prices for non-energy imports are adding to costs for Canadian companies.
The Monetary Policy Report raised its annual inflation forecast to 2.9% in 2026, from July’s estimate of 2.5%. For 2027, the forecast rose to 3.1% from 2%, before reaching 2.2% in 2028, compared with July’s estimate of 2.1%. That means the expected price path for next year is now clearly above the bank’s previous forecast, with inflation set to remain above 3% through most of the year. The bank said it would take time for costs to pass through to consumers, while companies expect to pass on a larger share of higher input costs over the next twelve months. It added that the timing and extent of that pass-through remain uncertain.
Economic activity indicators, meanwhile, showed the economy continued to grow, although the bank expects it to slow toward year-end. Gross domestic product grew 3.3% in the second quarter of 2026, and recent indicators point to growth of about 2% in the third quarter. The bank expects growth to slow in the fourth quarter because of new U.S. tariffs. On an annual basis, it raised its growth estimate to 1% in 2026 from 0.7% in the July report, and to 2% in both 2027 and 2028, compared with a previous forecast of 1.8% for each year. The bank said household consumption remained resilient and business investment rebounded, supported by oil and gas activity and spending on machinery and equipment.
The decision comes against a backdrop of continued divergence between price pressures and some indicators of economic slack. The unemployment rate has remained around 6.5% for several months, and the bank said a broad range of indicators still point to some excess supply. At the same time, U.S. demand and energy production boosted exports, in the bank’s assessment, while business investment rebounded alongside oil and gas activity. This mix leaves policymakers facing pressure from energy and imports alongside a labor market where unemployment remains relatively high, according to the data described in the statement. The bank said retaliatory tariffs could add to import cost pressures in the coming months.
In markets, the S&P/TSX Composite fell 0.08% to 836,142.86 points at 10:19 a.m. Eastern time on October 28, according to Reuters via MarketScreener. EL7 data showed the U.S. dollar closed at 1.40515 against the Canadian dollar on October 27, then at 1.40193 on October 28. The available data did not include an explanation for the currency move or its direct relationship to the rate decision. In its guidance, the bank said another policy rate increase "may be necessary," with decisions to be made meeting by meeting. It said the Governing Council agreed to proceed cautiously because of uncertainty.
The Bank of Canada set December 9, 2026, as the date for its next announcement on the overnight policy rate. The next Monetary Policy Report is scheduled for January 27, 2027. The report will update the growth and inflation forecasts the bank raised in October. Until then, the bank said the inflation path will be affected by energy and import prices and by the pass-through of costs to consumer prices. The council did not specify the size or timing of any further increase, leaving its next decision tied to incoming data and economic conditions.