Bank of Canada raises rate to 2.5%, sees inflation above 3% through 2027
Key Facts
On October 28, the Bank of Canada raised its overnight rate target by 25 basis points to 2.5%, reflecting concern that inflationary pressures will persist despite an improved outlook for domestic growth. The bank’s lending rate rose to 2.75% and its deposit rate to 2.45%, according to its statement. In its accompanying Monetary Policy Report, the bank raised its estimate for Canadian GDP growth in 2026 to 1% from 0.7% in its July forecast. It expects growth of 2% in each of 2027 and 2028. The decision came as the bank also raised its estimate for global economic growth this year, with higher energy costs and import costs continuing to pose risks to prices.
The bank said the Consumer Price Index rose 3.1% in September, while inflation excluding gasoline was 2.2%, and core inflation measures remained close to 2%. But the projected path for prices is now higher: the bank expects inflation to remain above 3% through the third quarter of 2027, about one percentage point higher than its estimate in the July report. It expects inflation to reach 3.1% in 2027, compared with a previous forecast of 2.0%, before easing to 2.2% in 2028. The bank attributed the pressures to higher energy and import costs, and said U.S. tariffs and trade uncertainty are weakening demand but only partly offsetting those pressures. Its surveys also showed that businesses expect to pass more input costs on to prices over the coming year.
On economic activity, Canadian GDP grew at an annualized rate of 3.3% in the second quarter, while more recent indicators pointed to growth of about 2% in the third quarter. But the bank expects growth to slow to below 1% in the fourth quarter of 2026, as new U.S. tariffs weigh on exports and spending. Unemployment remained near 6.5% for several months, alongside broad signs of excess supply in the economy. In October, the bank raised its estimate for Canadian economic growth in 2026 but kept its forecasts for 2027 and 2028 at 2% each. The figures come as the economy slows toward year-end while businesses and households face higher energy costs.
The bank’s outlook for global growth in 2026 improved to 3.1% from 2.8% in the July report, while its estimate remained 3.2% for both 2027 and 2028. It said global activity had remained resilient despite higher energy prices, supported by U.S. consumer spending and investment related to artificial intelligence. It added that China’s growth rebounded in the third quarter after slowing in the second, supported by strong exports and increased fiscal spending. In markets, the bank noted that government bond yields in advanced economies had risen since July, and that equity and credit markets had been volatile amid uncertainty about the artificial intelligence sector. It said, "Global financial conditions have tightened since July."
On the currency front, the bank said the Canadian dollar had recovered to about 71 U.S. cents after slipping somewhat against a stronger U.S. dollar, returning to the level assumed in the July report. The U.S. dollar against the Canadian dollar closed at 1.40515 on October 27 and 1.39836 on October 28, according to EL7 data. The new rate path leaves the currency facing a mix of tighter monetary policy and growth and trade pressures, while the bank indicated that its Governing Council may need to raise rates further. The council said, "A further increase in the policy rate may be needed, but amid uncertainty, it agreed to proceed carefully." The bank is scheduled to announce its next interest rate decision on December 9, 2026, with its next Monetary Policy Report due on January 27, 2027.