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 rate target by 25 basis points to 2.5%, its first increase since July 2023. The bank rate rose to 2.75% and the deposit rate to 2.45%, according to the official statement. The Governing Council said the move aims to limit the risk that persistently higher energy prices will spread to prices for other goods and services. It noted that rising oil prices and refining margins had pushed inflation higher in most countries. The decision reflects the bank’s concern that the energy shock could have a broader impact while Canadian measures of core inflation remain near 2%.
Canada’s consumer price inflation was 3.1% in September, while the index excluding gasoline rose 2.2%, according to the Monetary Policy Report. In the same month, energy inflation climbed to 19%, driven by gasoline and heating oil prices. Services inflation excluding shelter was also 3.7%. The bank said higher fuel prices increase production and transportation costs, and that households’ and businesses’ short-term inflation expectations had risen. The bank raised its 2027 inflation forecast to 3.1% from 2.0% in its July report, and expects inflation to remain above 3% through the third quarter of 2027 before gradually easing to near 2% by mid-2028.
The bank attributed the expected pressures to the pass-through of higher energy costs and non-energy imports to consumer prices, alongside a decline in excess capacity. Governor Tiff Macklem said the rate increase was necessary to reduce the risk that higher energy prices would turn into broad-based inflation. The Governing Council added that another increase may be needed, but decided to “proceed cautiously” amid uncertainty. In its July report, the bank had expected inflation to return to around 2% in early 2027, averaging close to 2% in 2027 and 2028. The change in the projected path shows that the energy shock led the bank to delay inflation’s return to its target.
On economic activity, the Bank of Canada estimated that gross domestic product grew 3.3% in the second quarter of 2026, and said recent indicators point to growth of around 2% in the third quarter, above the July report’s projection. The bank expects the economy to grow 1% in 2026, then 2% in each of 2027 and 2028, an overall outlook that is somewhat stronger than its July estimates. These projections come as the bank weighs economic growth against the risk of persistent price pressures. The statement did not set a fixed course for future rate decisions, but left open the possibility of another increase. The next overnight rate decision is scheduled for December 9, 2026.
The Canadian dollar moved ahead of the decision as investor expectations for interest rates and oil shifted. On October 23, it reached 1.3969 Canadian dollars per U.S. dollar, its strongest level since September 16, amid rising oil prices and increased bets on a rate hike. It then fell 0.3% on October 27 to 1.4050 per U.S. dollar as oil prices declined and investors awaited the expected decision. After the announcement, the S&P/TSX Composite Index was down 0.08% at 836,142.86 points at 10:19 a.m. Eastern time. Mining shares weighed on the index, along with declines in the real estate and financial sectors.
The Bank of Canada’s next Monetary Policy Report will be released on January 27, 2027, after the scheduled December decision. The path of energy prices, import costs and inflation developments are among the factors the bank cited in explaining its outlook. The bank also lists the decline in excess capacity among the factors that could keep price pressures in place. It expects inflation to ease gradually after remaining above 3% through the third quarter of 2027. This path aims to bring inflation back to near 2% by mid-2028.