Bank of Canada raises rate by 25 basis points to 2.50% to curb energy shock pass-through

Key Facts

The Bank of Canada on October 28 raised its overnight rate target by 25 basis points to 2.50%, saying the move was intended to reduce the risk that higher energy prices would spread to the prices of other goods and services. The bank raised its rate to 2.75% and the deposit rate to 2.45%, according to its statement. The decision comes as inflation has remained near 3% since April, with the bank expecting it to reach about 3.5% by year-end as oil prices continue to rise. The Governing Council said another increase may be necessary, but that it would "proceed cautiously" because of uncertainty. That wording leaves the monetary policy path open as the bank weighs price pressures against indicators of economic activity.

Bank data showed gross domestic product grew 3.3% in the second quarter of 2026, while recent indicators point to growth of about 2% in the third quarter, stronger than the bank expected in its July report. The bank expects the economy to grow 1% in 2026, then 2% in each of 2027 and 2028, with 2026 growth expected to be slightly stronger than the July estimate. The third-quarter reading follows stronger-than-expected growth in the previous quarter, but does not change the bank's assessment that economic growth will remain modest this year. The forecasts put the inflation path at the center of the rate decision, even as near-term quarterly indicators improve. The bank did not announce a change to its growth forecasts for 2027 and 2028 in its statement.

The bank expects consumer price inflation to average 3% in 2027, one percentage point above the July report's forecast, before easing to 2% in mid-2028. It said inflation had remained near 3% over the past six months, driven largely by higher gasoline prices. Inflation is expected to rise to about 3.5% by the end of 2026 as oil prices continue to climb. The Monetary Policy Report said the inflation forecast revision reflects higher oil prices and refining margins, which are expected to remain elevated for longer because of external conflicts. The report also noted that higher import prices and Canadian counter-tariffs add modest upward pressure.

The bank said the conflict in the Middle East had entered its eighth month with no clear path to a resolution, and that sustained energy price increases and cost pass-through were adding to inflationary pressures. Higher fuel costs have raised production and transportation expenses, while prices for imported industrial and electronic inputs have also risen. The bank said companies had absorbed most of the increase in input costs so far, but its surveys suggest that pass-through to prices will increase over the coming year. Short-term inflation expectations have risen, while longer-term expectations have remained stable. These factors explain why the Council is focused on limiting the energy shock's spread to a broader range of prices.

The third-quarter Business Outlook Survey showed companies' inflation expectations rising as oil prices climbed and new tariffs were imposed. The bank said responses collected after trade talks between Canada and the United States stalled on August 21 suggest that new U.S. tariffs and Canadian counter-tariffs are weighing on companies' outlooks. This adds pressure to business decisions as the cost of imported inputs and transportation rises. At the same time, the bank said companies had absorbed most of the increase in input costs so far, although its surveys expect pass-through to increase over the coming year. The bank includes these risks in its assessment that inflation will persist, while stressing that uncertainty calls for caution.

The decision was reflected in the Canadian bond market on the day it was announced: the two-year government bond yield rose 4.8 basis points to 3.417%, and the 10-year yield climbed 3 basis points to 3.861%, according to data cited by Investing.com. The two yields moved higher after the overnight rate target was raised, while the bank left the possibility of another increase open. The Council did not settle the course of its next move, saying it may need to raise rates again but would proceed cautiously amid an uncertain outlook. Investors are watching for the next rate announcement on December 9, 2026. The next Monetary Policy Report is scheduled for January 27, 2027.