Bank of Canada Raises Rate by 25 Basis Points to 2.5% as Inflation Is Forecast at 3% in 2027
Key Facts
The Bank of Canada raised its overnight rate target by 25 basis points to 2.5% on October 28, its first increase since July 2023, and set the bank rate at 2.75% and the deposit rate at 2.45%. The bank said consumer price inflation had remained near 3% since April and forecast it would rise to about 3.5% by year-end. In its Monetary Policy Report, it forecast average inflation of 3% in 2027, one percentage point above its July forecast, before returning to near 2% by mid-2028. The decision reflects continued price pressures even as the bank expects Canadian economic growth to improve in 2026. The Governing Council said, "A policy rate increase may be needed, but amid uncertainty, the Council agreed to proceed cautiously."
The bank forecast Canadian economic growth of 1% in 2026, followed by 2% in each of 2027 and 2028. Its July projections pointed to growth of 0.7% this year, according to Reuters, while the bank’s public statement did not give the previous figure. Gross domestic product grew at an annualized rate of 3.3% in the second quarter, and recent indicators point to growth of about 2% in the third quarter. But the bank said activity would slow in the fourth quarter, as new U.S. tariffs weigh on exports and spending. The unemployment rate has remained around 6.5% for several months, while a broad range of indicators continued to point to some excess supply in the economy.
The Bank of Canada attributed its higher inflation forecasts to rising energy prices that are expected to remain elevated, along with increases in non-energy import prices. It said its surveys indicate that businesses expect to pass an increasing share of input costs on to prices over the next twelve months, as excess capacity is gradually absorbed. The bank added that the path of energy prices and the Canada-U.S. trade relationship are the two main sources of risk to its inflation outlook. At the same time, it said tariffs and trade uncertainty are weighing on the economy, with growth expected to slow at year-end. These factors leave the bank facing persistent price pressures alongside an expected loss of momentum in activity during the fourth quarter.
The bank raised its forecast for global output growth to 3.1% in 2026 and kept its projections for 2027 and 2028 at 3.2%. It said global activity had remained resilient despite higher energy prices, supported by consumer spending and artificial intelligence-related investment in the United States. Chinese growth rebounded in the third quarter after slowing in the second, supported by strong exports and increased fiscal spending. But the bank said global financial conditions had tightened since July, with sovereign bond yields rising in advanced economies and equity and credit markets volatile amid uncertainty about the artificial intelligence sector’s outlook. Canada’s rate increase comes as global markets face tighter financial conditions and risks tied to energy and trade.
The Canadian dollar rose after the decision, as did bond yields; the two-year Canadian bond yield briefly reached 3.441%, its highest level since August 2024, according to Reuters. EL7 data showed the U.S. dollar-Canadian dollar pair closed at 1.40515 on October 27 and at 1.39951 on October 28. These closes capture the pair’s movement between the day before the decision and the day it was announced, while bonds moved higher during trading. The bank is scheduled to announce its next interest rate decision on December 9, 2026. It also set January 27, 2027, as the date for its next Monetary Policy Report.