Bank of Canada Raises Rate by 25 Basis Points to 2.5% as Inflation Pressures Persist
Key Facts
The Bank of Canada raised its overnight target rate by 25 basis points to 2.5% on October 28, a move it said was intended to limit the pass-through of higher energy costs to goods and services prices. The bank set its bank rate at 2.75% and its deposit rate at 2.45%. The decision came after the target rate had remained at 2.25% since September 2. Governor Tiff Macklem said it was the first rate increase since July 2023. The Canadian dollar recovered to about 71 U.S. cents after weakening somewhat against a stronger U.S. currency, the same level assumed by the bank in its July report.
The bank tied its tighter monetary policy to a changed inflation outlook since its July report, saying inflation had become higher and more persistent than expected. Consumer price inflation was 3.1% in September, but eased to 2.2% excluding gasoline, while measures of underlying inflation remained near 2%. The bank said energy and import costs were filtering through to a broader range of prices. Macklem added that a rate increase was necessary to reduce the risk that higher energy prices would turn into broad-based inflation. These concerns carry greater weight because the bank’s inflation forecast for 2027 rose by about one percentage point compared with its July report.
The bank said global oil prices had risen as the war in the Middle East continued and were likely to remain elevated for longer, increasing fuel and business costs. Meanwhile, the unemployment rate had remained near 6.5% for several months, with signs of excess supply in the economy persisting. Macklem said new U.S. tariffs could weigh on growth, even as inflation risks needed to be contained. The bank also identified Canada-U.S. trade relations and energy prices as key risks to its price outlook. It warned that additional U.S. trade restrictions or continued uncertainty could weaken exports, business investment and household spending.
On economic activity, Canada’s gross domestic product grew 3.3% in the second quarter of 2026, driven by higher exports and resilient domestic demand. The bank estimated third-quarter growth at about 2%, before it slowed to less than 1% in the fourth quarter because of new U.S. tariffs and trade uncertainty. The bank raised its annual growth forecast to 1% in 2026, with growth expected to accelerate to 2% in each of 2027 and 2028. It attributed the growth forecast revision to stronger activity in the middle of the year. That puts the rate increase against two divergent trends: more persistent inflation and growth set to slow at year-end.
Market data showed the U.S. dollar/Canadian dollar pair closed at 1.40515 on October 27, then fell to 1.39951 on October 28 and 1.39858 on October 29. It had closed at 1.40072 on October 22, 1.40011 on October 23, 1.40044 on October 25 and 1.40113 on October 26. These closes reflect a decline in the pair after the October 27 level, meaning the Canadian dollar rose against its U.S. counterpart during those sessions. Describing the currency’s move, the Bank of Canada said it had weakened somewhat against a stronger U.S. dollar before recovering to about 71 cents. The bank said that level remained in line with the assumption in its July report.
Looking ahead, the bank said a further rate increase could be necessary, but the Governing Council agreed to proceed cautiously amid uncertainty. The next scheduled announcement of the target rate is due on December 9, 2026. The next Monetary Policy Report will be released on January 27, 2027. In light of the risks it identified, the bank’s considerations will include the path of energy prices and developments in trade relations with the United States. It also warned that additional U.S. trade restrictions or continued uncertainty could weaken exports, investment and spending.