OTTAWA
The Bank of Canada raised its benchmark interest rate by a quarter of a percentage point on Wednesday, the first hike in nearly a year.
The central bank's policy rate now stands at 2.5 per cent, up from 2.25 per cent where it had been held since July 2023.
The move was widely expected by financial markets and economists, as the bank has signalled increasing worry about inflation stemming from war in the Middle East.
Monetary policymakers had said they would look past the initial inflationary surge tied to rising energy prices but would raise the policy rate if there were signs price pressures could spread beyond the gas pumps.
Inflation is now at 3.1 per cent, driven almost entirely by high energy prices.
Alongside the rate decision, the Bank of Canada released updated forecasts for inflation and economic growth.
Some economists predict this hike will be the start of a cycle of increases. David Doyle, head of economics at Macquarie Group, expects the central bank will keep raising rates through 2027 by 125 basis points, which would bring the overnight rate to 3.5 per cent.
Others disagree. Andrew DiCapua, principal economist at the Canadian Chamber of Commerce, says despite the inflation factor, the Canadian economy is weak right now.
"The economy doesn't need that slowing. We don't need to hit on the brakes," DiCapua said.
He says if the bank did raise rates, it would "send a message" that the bank is taking care of inflation, and predicts the bank would then wait to see if further rate hikes are truly necessary.
Even ahead of the interest rate decision, some housing market experts said the potential for a rate hike was already having an impact.
Home sales dropped 7.7 per cent in September compared to the same month last year, according to the Canadian Real Estate Association.
"Things are pretty slow right now," said John Pasalis, president at Move Smart Realty.
Pasalis said fixed mortgage rates have been climbing as bond yields have risen, while variable rates tied to the Bank of Canada's rate had stood still. He added that the prospect of a rate increase has also made some potential home buyers wary.
"Two rate hikes in the next six months is one thing, but four rate hikings obviously is a much … bigger story," Pasalis said. "I don't think we're there. But again, I think if the sentiment shifts in that direction, then that's going to impact buyer behaviour."
Before the decision, most members of the C.D. Howe Institute's monetary policy council were calling on the Bank of Canada to hold rates, as they saw "little evidence of broader price pressures" beyond energy.
The council's opinions for October 2027 diverge, with rates ranging anywhere from the current level of 2.25 per cent all the way to 3.25 per cent.
Canada's central bank isn't alone in grappling with whether to raise rates to slow inflation. The U.S. Federal Reserve faces a similar dilemma ahead of its rate decision later Wednesday.
The Fed is widely expected to hold rates steady after raising them last month. Markets anticipate at least two more hikes by mid-2027 in the U.S. as inflation remains raised with the ongoing U.S.-Iran conflict.
Some analysts suggest the Fed's influence on markets is being overshadowed by other factors.
"I don't think the Fed is entirely in the driver's seat in today's market. Increasingly, the bigger story is the AI-driven investment cycle and what happens to risk sentiment around it," Christian Hoffmann, head of fixed income at Thornburg Investment Management, told Reuters.
The Bank of Canada's decision comes as a tariff dispute with the United States threatens economic growth. e2gold.ca reported last week that the federal and Ontario governments pledged $9 billion for industries hit by U.S. tariffs.
This story was written by the e2gold.ca newsroom from reporting by BNN Bloomberg and CBC News. Quotes are checked word for word against that reporting.