Bank of Canada raises rate to 2.5% in its first increase since 2023, citing energy costs

The Bank of Canada raised its overnight rate target by 25 basis points to 2.5% on Wednesday, according to its announcement. Governor Tiff Macklem said it was the first increase since July 2023. The bank said it acted to reduce the risk that continuing high energy prices spread to the prices of other goods and services.

What happened

The bank also set the Bank Rate at 2.75% and the deposit rate at 2.45%. Macklem, speaking in Ottawa at the release of the Monetary Policy Report, said Governing Council weighed two options, hold or hike.

The argument for holding, he said, was that the rise in inflation had so far been concentrated in energy prices and in services that rely heavily on energy, such as airfares. Consumer price inflation excluding gasoline was 2.2% in September, and measures of core inflation remain close to 2%, the bank said. The argument for an increase was that energy prices are higher and are expected to stay higher, and that cost pressures are building.

"With elevated inflation expected to last longer and the economy showing resilience, Governing Council agreed that risks to inflation had increased and there was less scope for monetary accommodation," Macklem said in his opening statement.

The inflation and growth outlook

The bank said consumer price inflation has been around 3% since April and is expected to rise to about 3.5% by the end of the year. It expects inflation to average 3% in 2027, a percentage point above its July projection, and to return to 2% in the middle of 2028. The bank said the conflict in the Middle East is now in its eighth month with no clear path to resolution, and that businesses have mostly absorbed higher input costs so far but that its surveys suggest more of those costs will be passed on over the next year.

Growth is projected to be 1% in 2026 and 2% in 2027 and 2028, which the bank described as somewhat stronger than in its July report. Gross domestic product grew 3.3% in the second quarter, and recent indicators point to growth of about 2% in the third quarter. The bank expects growth to slow in the fourth quarter because of new US tariffs, before picking up in 2027. The unemployment rate has been around 6.5% for several months, and the bank said a broad set of indicators point to some excess supply in the economy.

The global backdrop

The bank said global financial conditions have tightened since July, with advanced-economy government bond yields higher and equity and credit markets volatile because of uncertainty about the outlook for the artificial-intelligence sector. It said the Canadian dollar had weakened on US-dollar strength but has recovered to around 71 US cents, the level it assumed in July. It revised its forecast for global growth in 2026 up slightly to 3.1%.

The US Federal Reserve left its target range at 3.75%-4.00% on the same day, in a 10-2 vote. Our report on the Fed decision has the details.

What to watch

The bank said there could be a need to raise the policy rate further, but that given the uncertainties Governing Council agreed to proceed carefully, taking decisions one meeting at a time. The next scheduled announcement of the overnight rate target is on December 9, and the next Monetary Policy Report is due on January 27, 2027, according to the bank's press release. The bank named developments in the Middle East and businesses' responses to cost pressures as the main sources of uncertainty around its inflation forecast.