Macro
Bank of Canada Raises Rate to 2.5% in First Hike Since 2023 and Leaves Door Open to More
Image: KaiPilger via Pixabay
Policymakers cite the risk that high energy costs spread into broader inflation, hours before the Federal Reserve's own decision.
By Emmanuel Cruz ·
The Bank of Canada raised its benchmark interest rate by a quarter of a percentage point to 2.5% on Wednesday, its first increase since July 2023 and its first change to borrowing costs in a year, and said further tightening could be needed [1].
The move was widely anticipated by markets, though forecasters had been divided ahead of the announcement, with some expecting the central bank to stay on hold [1][2]. The rate had been held at 2.25% since a cut in October 2025, and the bank left it unchanged at each of its six earlier decisions this year [2].
Governor Tiff Macklem said the increase was meant to limit the danger that "elevated energy prices could spill over and become generalized inflation" [1]. Canadian consumer prices rose faster than the top of the bank's 1% to 3% control range in September, with energy prices up 19.0% from a year earlier and gasoline up 27.8% [2]. Excluding gasoline, annual inflation was 2.2% [2].
In its statement, the bank said inflation is "higher and more persistent than in the July Report," according to CoinDesk's coverage of the decision [3]. Macklem said inflation is expected to finish 2026 at about 3.5%, remain near 3% for most of 2027 and return close to the 2% target by mid-2028 [1]. The bank lifted its 2027 inflation forecast to 3.1% from 2.0% in July [1].
The growth picture was revised modestly higher. The bank now projects 1.0% growth for 2026, up from 0.7% in its July outlook, and raised its 2027 and 2028 forecasts to 2% from 1.8% [1]. It expects quarterly growth to slow to 2% in the third quarter and 0.8% in the fourth, after a 3.3% annualized pace in the second quarter, with Macklem pointing to new U.S. tariffs as a drag on the economy late this year [1].
On the outlook for rates, Macklem said another increase may be needed but that the bank would move cautiously given the level of uncertainty [1]. Reuters noted that even after the hike, the policy rate remains below the neutral level that neither stimulates nor restrains the economy [1]. Economists who argued against tightening pointed out that core inflation, which strips out volatile items, is running around 2%, and warned that higher rates could weigh on a modest recovery already strained by trade tensions with the United States and a soft job market [1].
For households, the decision feeds directly into variable-rate borrowing. Prime rates tied to the central bank's benchmark are set to rise by 0.25 percentage point, and MoneySense estimated the lowest five-year variable mortgage rate would climb to about 3.70% from 3.45% [2]. Fixed mortgage rates, which follow bond yields rather than the policy rate, had already moved up as investors priced in a hike [2].
Why it matters for markets: Canada's move comes just hours before the U.S. Federal Reserve announces its own decision at 2 p.m. ET, where investors broadly expect rates to be held steady but watch for signals about a possible increase later this year [3]. A rate hike by a major central bank in response to an energy-driven price shock adds to the debate over whether other policymakers will need to tighten. The U.S. two-year Treasury yield, which is sensitive to rate expectations, rose 3 basis points to 4.77% on Wednesday as traders hedged against the chance of a Fed hike [3].
What to watch next: the bank's next rate announcement is scheduled for December 9, 2026, and will not be accompanied by a new Monetary Policy Report [2]. Before then, Canadian inflation readings and energy prices will shape whether policymakers follow through on the possibility of another increase.
Sources:
[1] BNN Bloomberg (Reuters), "Bank of Canada raises key interest rate, says another hike possible", October 28, 2026. https://www.bnnbloomberg.ca/business/economics/2026/10/28/bank-of-canada-raises-key-interest-rate-says-another-hike-possible/
[2] MoneySense, "Bank of Canada raises interest rate to 2.5%, first hike since 2023", October 28, 2026. https://www.moneysense.ca/news/bank-of-canada-interest-rate-decision-announcement-october-28/
[3] CoinDesk, "Live updates: Bitcoin sheds early gains; Strategy's STRC moves to daily dividends", October 28, 2026. https://www.coindesk.com/business/2026/10/28/live-updates-bitcoin-climbs-above-usd81-000-as-majors-rally-ahead-of-fed-decision
This article was produced with AI assistance. It is for informational purposes only and is not financial advice. StockVolt and its authors may hold positions in securities mentioned.