Bank of Canada raises key rate to 2.5% as energy costs lift inflation
Bank of Canada raised its key rate a quarter point to 2.5%, its first hike since July 2023, and lifted its 2027 inflation forecast to 3.1% from 2%.
What you need to know
The Bank of Canada raised its key interest rate by 25 basis points to 2.5% on 28 October 2026, its first increase since July 2023, Al Jazeera reported. Governor Tiff Macklem cited elevated energy costs and spillover risk, and the bank lifted its 2027 inflation forecast to 3.1%.
- The quarter-point move to 2.5% was the first rate hike since July 2023 and was widely expected.
- The bank raised its 2027 inflation forecast to 3.1% from 2% predicted in July.
- Annual inflation hit 3.2% in September, above the bank's 1% to 3% target range.
- Macklem said further increases may be needed but the bank will proceed carefully.
What the bank decided
The Bank of Canada raised its key interest rate by a quarter point to 2.5% on Wednesday, its first increase in more than three years, Al Jazeera reported. The move was widely expected.
Governor Tiff Macklem said the outlook for inflation was substantially higher while the economy showed resilience, so a higher policy rate was needed to reduce the risk that elevated energy prices spill over into generalised inflation. He said further increases could be needed but that the bank would proceed carefully given uncertainties.
The bank lifted its 2027 inflation forecast to 3.1% from the 2% it predicted in July, and raised its growth forecast for this year to 1% from 0.7%.
Inflation and the debate
Annual inflation reached 3.2% in September, above the bank's 1% to 3% target range, driven almost solely by higher energy and energy-related transportation costs. Macklem said inflation was expected to end the year at 3.5% and stay near 3% for most of 2027 before returning close to 2% by mid-2028.
Economists who opposed the hike noted core inflation, which strips out volatile items, remains around 2%, and argued a hike could slow a modest recovery given US trade tensions and a weak job market.
Andrew Grantham, senior economist at CIBC Capital Markets, said he does not expect core inflation to accelerate as much as the bank fears and does not think the policy rate will need to move above 2.75%.
Growth outlook and next steps
The bank projected annualised growth slowing from 3.3% in the second quarter to 2% in the third and 0.8% in the fourth. It raised its GDP forecast for 2027 and 2028 to 2% from 1.8% for both.
Macklem said new US tariffs would slow the economy in the fourth quarter but expected growth to pick up in 2027. The next rate decision is scheduled for 9 December.
Why did the Bank of Canada raise rates despite core inflation near 2%?
Governor Tiff Macklem said the inflation outlook was substantially higher and the economy resilient, so a higher rate was needed to limit the risk that elevated energy costs spill over and become generalised inflation.
Sources & context
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