Bank of Canada Raises Rate to 2.5 Percent, First Hike Since 2023

The Bank of Canada raised its key policy rate by 25 basis points to 2.5 percent on Wednesday, October 28. The increase is the first rate hike since July 2023 and the bank's first policy move in a year, Reuters reported. Canadian outlets Storeys and Zoocasa reported the same decision, a quarter point increase that ended the bank's holding pattern.

Governor Tiff Macklem said the move was needed because the outlook for inflation is now substantially higher. "With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation," Macklem said in opening remarks to reporters, according to Reuters.

Why the bank moved

Annual inflation hit 3.2 percent in September, above the bank's 1 to 3 percent target range. Reuters reported that the increase was led almost solely by higher energy and energy related transportation costs. That put the bank in a difficult position. Prices were rising faster than its target, and the main driver was energy, which can spread into other prices if households and businesses begin to expect high inflation to continue.

The bank's own statement, carried in full by Reuters, put the decision plainly. "Today, we raised the policy interest rate by 25 basis points, bringing it to 2.5%. This is the first interest rate increase since July 2023," Macklem said.

Forecasts point higher for longer

The bank raised its 2027 inflation forecast to 3.1 percent, from 2.0 percent predicted in July. It put 2026 growth at 1.0 percent, up from 0.7 percent in July. Macklem said inflation is expected to end the year at 3.5 percent, stay around 3 percent for most of next year, and return close to the 2 percent target by the middle of 2028.

The Monetary Policy Report projected growth slowing to 2 percent annualized in the third quarter and 0.8 percent in the fourth quarter, after 3.3 percent in the second quarter. The bank upgraded its 2027 and 2028 GDP forecasts to 2 percent, from 1.8 percent.

More hikes are possible, with care

Macklem said further increases might be needed, but the bank would proceed carefully given the uncertainties it faces, including the trade rift with the United States and the Middle East conflict. "There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully," he said, according to Reuters.

For borrowers, the decision means the rate that influences Canadian mortgages and loans is now higher than it was on Tuesday, and the bank has not ruled out raising it again. For savers and lenders, the message is that the bank sees inflation staying above target well into next year.

Market reaction and what comes next

The Canadian dollar firmed slightly after the decision, to C$1.4050 to the US dollar, or 71.17 US cents, Reuters reported. The next rate decision is on December 9, when the bank will have to judge whether energy prices are still pushing inflation up and whether another increase is needed.