OTTAWA
The Bank of Canada raised its policy interest rate by a quarter of a percentage point to 2.5 per cent on Wednesday.
It is the central bank’s first rate hike since July 2023.
Governor Tiff Macklem said the outlook for inflation has deteriorated since the bank’s July report.
“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 raised energy prices could spill over and become generalized inflation,” Macklem said in prepared remarks.
The central bank now projects inflation will remain above three per cent throughout the rest of 2026 and much of 2027.
It revised its projected average inflation rate upward to 2.9 per cent for 2026 and 3.1 per cent in 2027.
Inflation is expected to reach about 3.5 per cent by the end of 2026 and average three per cent in 2027 before returning to the bank’s two per cent target in mid-2028.
The bank said persistently high oil prices, driven by the prolonged conflict in the Middle East, and uncertainty surrounding Canada’s trade relationship with the United States are the two biggest risks to increasing costs of living.
The price of Brent crude is averaging $124.96 per barrel in October, about $35 more than in July.
“What we don’t want is those higher energy prices to pass through and raise the prices of other goods and services that … Canadians are buying,” Macklem told reporters.
The bank’s most recent Business Outlook Survey found that roughly half of firms surveyed said they are planning to pass higher fuel costs onto consumers by the end of the year.
Of the consumer-facing businesses surveyed by the central bank, 60 per cent expect to pass costs on to customers in the next 12 months.
The decision also reflects a somewhat stronger economic outlook.
Growth picked up in Canada through the middle of the year, reaching 3.3 per cent in the second quarter.
The bank forecasts Canadian growth of one per cent this year and two per cent in both 2027 and 2028.
Macklem warned that the fourth quarter will likely show slower growth as new U.S. tariffs weigh on activity.
The unemployment rate has hovered around 6.5 per cent in recent months.
“There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully,” the bank said in its statement.
Macklem did not say whether additional hikes are coming.
“We’ve indicated there could be a need for further increases in our policy rate, but we are conscious that uncertainty is high, we’re going to take these decisions one meeting at a time,” Macklem said.
Taylor Schleich, director of economics and strategy at the National Bank of Canada, said the inflation outlook was jarring.
“The Bank of Canada is not projecting price stability,” he said in an interview.
He now expects another 25-basis point hike to 2.75 per cent in December.
Shelly Kaushik, a senior economist at BMO Capital Markets, expects another 25-basis point hike in January.
“It’s hard to argue for just one rate hike unless things meaningfully change from here,” she said.
TD Bank economist Marc Ercolao described the increase as a precaution.
“In a world of higher oil prices, the Bank of Canada is hiking from a risk management perspective to ensure inflation remains on target in the months ahead,” wrote Ercolao.
He suggested another 0.25 per cent increase would provide additional protection.
Royal LePage president and CEO Phil Soper warned that higher borrowing costs will add pressure to an already weak housing sector.
“Canada’s housing sector is a powerful engine of economic activity, supporting employment and consumer spending across the economy. Its prolonged weakness is already weighing on economic growth, and higher borrowing costs will only deepen that challenge,” said Soper.
The central bank’s next three policy interest rate announcements are scheduled for Dec. 9, 2026, Jan. 27, 2027, and March 3, 2027.
This story was written by the e2gold.ca newsroom from reporting by BNN Bloomberg, CP24, Financial Post and Daily Hive. Quotes are checked word for word against that reporting.