Bank of Canada Raises Rate to 2.5%, Leaves Door Open to Further Tightening

Key Facts

The Bank of Canada published on November 10 a summary of its deliberations on the October 28 decision, saying council members discussed holding the policy rate at 2.25% or raising it to 2.5% before choosing the increase. The deliberations put the energy shock at the center of the decision, after members judged it could keep consumer price inflation near 3% for more than a year, even if energy costs were not passed through to consumer prices. The bank said the benchmark oil price was about US$35 per barrel above the assumption in its July report. Market expectations had also shifted, according to the summary, toward oil prices remaining elevated for longer. By contrast, the council noted that measures of core inflation remained near 2%, leaving it the option of holding rates during the deliberations.

The case for holding rates was based on inflation excluding gasoline at 2.2%, measures of core inflation remaining near 2%, and some economic slack. Supporters of a hold said these indicators allowed time to assess how price pressures were developing, while the energy shock alone was not evidence that higher costs were passing through to prices broadly. But the council also faced the possibility that oil’s effects would persist for an extended period, even without that pass-through. Oil was about US$35 per barrel above the July report’s assumption, while market expectations pointed to a longer-lasting rise. Policymakers thus faced limited core inflation against the risk that headline inflation would remain above the level reflected in inflation excluding gasoline.

The deliberations also covered the outlook for the Canadian economy. The council raised its forecast for gross domestic product growth in 2026 to 1%, and expected growth to accelerate to 2% in both 2027 and 2028, while some slack remained. GDP grew 3.3% in the second quarter, while available indicators pointed to growth of about 2% in the third quarter. The bank said new U.S. tariffs could slow growth in the final quarter of 2026 before a recovery resumed in 2027. In the labor market, the council said unemployment was around 6.5% at the time of the deliberations. In a subsequent reading of the indicators, the seasonally adjusted Ivey Purchasing Managers Index was 58.3 points in October, compared with 58.2 in September and 52.4 in October 2025; the October reading was published on November 6.

The bank also pointed to a slight improvement in its global economic outlook, raising its estimate for global GDP growth in 2026 to 3.1%. This external backdrop provides context for its domestic forecasts as the council weighs the impact of U.S. tariffs on growth against higher energy prices and inflation. After raising the rate to 2.5%, the council said another increase might be needed and that it would assess decisions meeting by meeting in light of available information. The summary said, "There is a possibility that the policy rate may need to be raised further." The council set no automatic path for its next steps, leaving the decision dependent on developments in the data, price pressures and economic activity.

In the initial reaction to the October 28 decision, the two-year Canadian bond yield rose by as much as 7.2 basis points to 3.441%, its highest level since August 2024. Swap market data showed a 45% probability of a rate increase in December, while the market had fully priced in a second increase by January. TD Securities analysts said the initial reaction was delayed by the meeting’s mixed tone before yields moved higher. They added that the bank tends to make consecutive increases after a long pause, and that the threshold for another increase in December appeared lower. This remains analysts’ interpretation and market pricing of the decision’s probability, while the council said its future judgments would be based on information available at each meeting.

The next interest rate announcement is scheduled for December 9, 2026, while the next Monetary Policy Report will be released on January 27, 2027. The December announcement will follow the council’s statement that decisions would be made meeting by meeting and that a further increase might be needed. The path discussed by the council starts from a higher level of 2.5% after the October decision, compared with the 2.25% hold option raised during deliberations. The bank’s upcoming dates offer another opportunity to assess whether the energy shock persists and how far it feeds through to inflation. The report scheduled for January will provide a subsequent update to the policy and economic outlook.