OTTAWA
The Bank of Canada raised its key interest rate by a quarter of a percentage point to 2.5 per cent on Wednesday, its first increase since July 2023.
The central bank’s governing council voted to hike the policy rate with the goal of preventing high oil prices from becoming a sustained inflation problem.
“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,” governor Tiff Macklem said in a statement.
The bank said inflation is now forecast to rise to about 3.5 per cent by the end of this year and is only expected to return to its two per cent target in mid-2028.
“Looking ahead, Governing Council agreed we would take future decisions one meeting at a time,” Macklem said. “There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully.”
Ontario Premier Doug Ford called the hike “a massive mistake” in a tweet before the announcement.
“Higher rates won’t get oil moving through the Strait of Hormuz or lower tariffs on Canadian businesses. They will only make life more expensive for Canadian families and workers, punishing them for something they can’t control,” Ford wrote.
Ontario Finance Minister Peter Bethlenfalvy, who is set to deliver the province’s fall economic statement on Thursday, said he understands Ford’s perspective.
“Who wouldn’t advocate for lower interest rates at a time when people are feeling the impacts of those higher interest rates? But at the end of the day, the Bank of Canada is an independent organization that has all the facts at their disposal, and keeping inflation in check is really important,” he told CTV News.
The decision was controversial, with some economists advising against a hike given the economic strain from the U.S. trade war.
Prior to the announcement, six of seven economists polled by the C.D. Howe Institute had called on the central bank to keep the rate at 2.25 per cent.
“In our view, the case for the central bank continuing to wait on the sidelines remains compelling,” RBC economists Frances Donald and Nathan Janzen wrote in a note to clients last week.
Inflation last month came in at 3.1 per cent, driven almost entirely by energy prices, while core measures eased below two per cent.
According to RBC, prices of West Texas Intermediate crude oil have averaged $95 a barrel since the last rate decision in early September, 54 per cent higher than a year ago.
The bank said the Canadian economy is expected to grow by one per cent in 2026 and two per cent in 2027, a somewhat stronger overall growth projection than its summer forecast.
When the overnight rate moves, the big banks typically adjust their prime rates within days. A matching quarter-point move would lift prime from 4.45 per cent to 4.70 per cent.
For a $500,000 variable-rate mortgage with a 25-year amortization, priced at prime minus 0.50 per cent, the monthly payment would climb by about $68.
Markets do not expect this rate decision to be the last. In a Reuters poll of economists taken Oct. 21 to 23, 16 of 29 respondents expected another hike before the end of March 2027.
Markets are pricing in four quarter-point hikes by the end of 2027, which would take the policy rate to 3.25 per cent.
The bank’s next decision is scheduled for Dec. 9.
This story was written by the e2gold.ca newsroom from reporting by The Globe and Mail, Yahoo News, Toronto Star and CTV News. Quotes are checked word for word against that reporting.