Bank of Canada Raises Rate by 25 Basis Points to 2.5% Amid Inflation Risks

Key Facts

On October 28, the Bank of Canada raised its overnight rate target by 25 basis points to 2.5%, its first increase since July 2023. The bank also raised its rate to 2.75% and its deposit rate to 2.45%. It said a further increase could become necessary to curb inflation risks after energy prices rose. Governor Tiff Macklem said the rate increase was intended to reduce the likelihood that higher energy prices would feed into broader inflation. But he stressed that the decision did not set a specific path for future moves.

The bank tied the possibility of further tightening to persistently high energy prices and their pass-through to prices for other goods and services. Macklem said, "An increase in the policy rate is necessary to limit the risk that elevated energy prices will feed through and turn into general inflation." The bank said higher fuel prices were raising production and transportation costs. Prices for industrial inputs and imported electronics also rose, while inflation excluding gasoline stood at 2.2% in September 2026. These factors put price pressures at the center of the rate decision as the bank assesses the economic outlook.

In its economic projections, the Bank of Canada forecast economic growth of 1% in 2026, followed by 2% in each of 2027 and 2028. It described the overall outlook as slightly stronger than its projections in the July report. At the same time, it said the unemployment rate had remained near 6.5% for several months through October 2026. The bank said broad indicators continued to point to excess supply in the economy. Its assessment thus combines a slightly stronger growth outlook with signs that excess supply in the economy persists.

The Canadian dollar moved higher after the rate increase, and Canadian bond yields rose, according to Reuters. The currency's gains came as the U.S. dollar broadly weakened after the Federal Reserve held interest rates steady. The report said the Canadian dollar "strengthened against its U.S. counterpart on Wednesday." The October 28 decision was the first rate increase since July 2023. The Bank of Canada will announce its next rate decision on December 9, 2026, and issue its next Monetary Policy Report on January 27, 2027.