Bank of Canada Raises Rate by 25 Basis Points to 2.5%, Sees Inflation at 3.5%
Key Facts
The Bank of Canada raised its overnight rate target by 25 basis points to 2.5% on October 28, saying inflation remains above target and there is a risk that higher energy prices will spread more broadly across prices. The bank set the bank rate at 2.75% and the deposit rate at 2.45%. The Governing Council said another rate increase could become necessary to prevent higher energy prices from feeding through to other prices. But it added that, amid uncertainty, the council agreed to "proceed cautiously." The decision puts monetary policy between containing price pressures and taking account of the growth outlook and trade relations with the United States.
The bank said consumer price inflation has remained near 3% since April and forecast it would rise to about 3.5% by the end of 2026. It attributed the projected path to persistently high oil prices and rising production and transportation costs. This means price pressures associated with energy could extend to the cost of producing and transporting goods, helping explain why the bank has kept the possibility of a rate increase open. The council did not set an automatic path for future decisions in its statement, instead tying its approach to the degree of uncertainty. It said any further move should balance the risk of inflation spreading against economic developments.
In its October economic projections, the Bank of Canada estimated gross domestic product growth at 1% in 2026, then 2% in each of 2027 and 2028. It said the outlook was stronger overall than in July, while uncertainty persisted, particularly around trade relations between Canada and the United States. The estimates come as the bank assesses the effects of energy costs and trade pressures on inflation and economic activity. The 1% growth forecast for 2026 puts this year at a slower pace than the estimates for 2027 and 2028. The bank kept trade among the factors clouding its outlook, without giving a timeline for uncertainty to ease.
Manufacturing data available before the October reading pointed to a slower pace of expansion in September, when the Canadian purchasing managers' index fell to 51.5 from 53.0 in August, its lowest reading since March, according to Reuters. The index remained above 50, the threshold separating expansion from contraction, but its components showed greater weakness. The output index fell to 50.8 from 52.8 in August, while new orders dropped below the 50 threshold for the first time since March. Reuters attributed the slowdown in expansion to trade frictions and higher energy prices. The reading provides context for the manufacturing sector's trajectory before the October reading, but does not establish the index level for that month.
S&P Global's Canadian manufacturing index is compiled from surveys sent to purchasing managers at a sample of about 400 manufacturers; a reading above 50 indicates an overall increase from the previous month. In the May 2026 reading, the index stood at 52.9 points, compared with 53.3 in April, with S&P Global describing the pace of growth as resilient and above its historical average. This provides a measure of how the index is calculated and an earlier reading for the year, not a substitute for the latest monthly figure. In September, the index's level of 51.5 meant expansion continued, while new orders falling below 50 indicated contraction in that component. The October reading remains the focus of the item related to the purchasing managers' index, but its figure and components have not been verified in the available evidence.
In market trading, the S&P/TSX Composite closed at 36,265.09 points on October 28, up 93.6 points, or 0.3%, marking its highest close since the previous Wednesday, according to Reuters. The energy sector rose 1.1%, while real estate fell 0.8% in the same session. Reuters said investors were fully pricing in a second Bank of Canada increase by January. This coincided with the October decision, while gains in energy and losses in real estate reflected diverging sector trends. The report does not give a probability for a second Bank of Canada increase; the 85% figure it cites concerns expectations for U.S. interest rates.
The Bank of Canada set December 9, 2026, as the date for its next announcement on the overnight rate target, with its next Monetary Policy Report due on January 27, 2027. The December announcement follows the October decision, while the January report will provide the next update to the bank's economic outlook. The bank had forecast growth of 1% in 2026 and 2% in each of 2027 and 2028, while noting that trade relations between Canada and the United States remain a source of uncertainty. It also forecast inflation near 3.5% by the end of 2026, after it had remained around 3% since April. The council said it would continue to proceed cautiously, keeping the possibility of another rate increase tied to the risk that higher energy prices spread to other prices.