Bank of Canada raises policy rate to 2.5%, leaves door open to further hikes

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 further increases could be needed if higher energy costs spread more broadly through the economy.

Governor Tiff Macklem said the rate increase was needed because the inflation outlook had risen substantially while the economy remained resilient. He said the central bank would proceed carefully because of economic uncertainty.

Annual inflation reached 3.2% in September, above the bank’s 1% to 3% target range, with the rise driven largely by energy and energy-related transportation costs. The bank expects inflation to end the year at 3.5%, remain around 3% for much of 2027 and return close to its 2% target by mid-2028. It raised its 2027 inflation forecast to 3.1% from 2% and increased its growth forecast for this year to 1% from 0.7%.

Macklem said higher energy prices could become more persistent as businesses pass increased costs on to consumers. He also said new U.S. tariffs were expected to slow growth in the fourth quarter, though the bank anticipates a recovery in 2027.

Some economists opposed the increase, noting that core inflation remains near 2% and warning that higher borrowing costs could hinder a modest recovery. CIBC economist Andrew Grantham said he did not expect the policy rate to rise above 2.75%, particularly if global energy prices ease.