The Bank of Canada raised its key interest rate Wednesday for the first time since July 2023.
The central bank increased its target for the overnight rate by 25 basis points, or a quarter percentage point, to 2.5% on October 28. The Bank Rate is now 2.75%, while the deposit rate is 2.45%, according to the Bank’s policy statement.
The decision came after economists and markets moved quickly toward expecting a hike. A Reuters poll published October 23 found 19 of 34 economists expected the Bank to raise the overnight rate to 2.5% at the October meeting. That marked a reversal from the previous poll, when 80% of respondents expected the Bank to hold at 2.25% through the end of 2026.
Why the Bank moved now
The Bank framed the decision around persistence. Energy prices are high, expected to remain high, and increasingly likely to work their way through business costs and consumer prices.
Governor Tiff Macklem said the rate hike was needed to “reduce the risk that elevated energy prices could spill over” into broader inflation. He also said Governing Council considered both holding and hiking.
The hold case was not weak. In his opening statement, Macklem said inflation excluding gasoline is still 2.2%, core measures remain close to 2%, and the economy still has some excess supply. New U.S. tariffs are also expected to slow growth in the fourth quarter.
The hike case won because the Bank now sees inflation staying higher for longer. CPI inflation has been around 3% since April and is expected to rise to about 3.5% by year-end. The Bank projects inflation will remain at or above 3% through much of 2027 before returning close to the 2% target by the middle of 2028.
Inflation data still shows a split
Statistics Canada said the Consumer Price Index rose 3.1% year over year in September, after a 3.0% increase in August. The acceleration was led by gasoline, which rose 27.8% year over year in September. Excluding gasoline, CPI rose 2.2%, down from 2.4% in August.
That split matters. Headline inflation is now slightly above the Bank’s 1% to 3% target range, but the clearest pressure remains tied to energy. Energy prices rose 19.0% year over year in September, while fuel oil and other fuels rose 57.8%. Statistics Canada said the fuel oil increase had a larger impact in Atlantic Canada, where fuel oil is more widely used.
The Bank’s concern is less about September’s core readings and more about what happens next. If high fuel, transportation, imported input and tariff-related costs keep moving into selling prices, inflation can become harder to bring back to target.
Pass-through risk puts businesses in the middle
The Bank’s Business Outlook Survey released October 19 showed why that risk is getting more attention. Firms’ expectations for input and selling-price growth moderated but remained elevated, often because of high global oil prices and trade tensions.
The survey also found that roughly half of firms planned to pass some or all of their cost increases to customers. For several firms, the Bank said, those plans reflected stronger demand and efforts to recover margins compressed by earlier cost increases.
For Canadian businesses, that creates a difficult mix: higher borrowing costs can arrive at the same time as higher operating costs.
Growth gave the Bank room to hike
The Bank also pointed to a stronger-than-expected economy. It said GDP grew at an annualized rate of 3.3% in the second quarter, and recent indicators point to annualized growth of about 2% in the third quarter. Consumer spending has been solid, business investment rebounded, and exports strengthened despite weakness in sectors affected by U.S. tariffs.
The Bank now projects GDP growth of 1% in 2026 and about 2% in both 2027 and 2028. It expects growth to slow in the fourth quarter as tariffs weigh on activity, but the revised outlook gave policymakers less reason to keep monetary policy as accommodative.
Another hike remains possible
Macklem said future decisions will be made one meeting at a time. He said there could be a need to raise the policy rate further, but the Bank will proceed carefully because uncertainty remains high.
The next scheduled interest rate announcement is December 9. By then, the Bank will have more evidence on whether the energy shock is staying concentrated in fuel prices or feeding into wider goods and services prices.
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