Bank of Canada raises key rate, says further increase may be needed

The Bank of Canada raised its key interest rate by a quarter percentage point to 2.5% on Wednesday, its first increase since July 2023, and said another increase may be needed if higher energy costs spread into broader inflation.

Annual inflation reached 3.2% in September, above the central bank’s 1% to 3% target range and driven largely by energy and energy-related transportation costs. The bank raised its inflation forecast for 2027 to 3.1%, from 2% in July, and expects inflation to end this year at 3.5%, remain near 3% for most of 2027 and return close to its 2% target by mid-2028.

“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 elevated energy prices could spill over and become generalised inflation,” Governor Tiff Macklem said. He added that policymakers would proceed carefully because of economic uncertainties.

The bank also lifted its growth forecast for this year to 1%, from 0.7%. Macklem said new U.S. tariffs would slow the economy in the fourth quarter, but projected growth would recover in 2027 as consumer spending, exports and business investment strengthen.

Andrew Grantham of CIBC Capital Markets said he did not expect the policy rate to need to rise above 2.75%, arguing that core inflation may not accelerate as much as the bank anticipates.