Bank of Canada raises its policy rate to 2.5%, its first hike since July 2023

The Bank of Canada raised its benchmark policy rate by a quarter of a percentage point to 2.5% on Oct 28, up from 2.25% and its first increase since July 2023. The Bank Rate is now 2.75% and the deposit rate 2.45%.

Governing Council said it raised the rate to reduce the risk that continuing high energy prices spread to the prices of other goods and services. The bank said there could be a need to increase the rate further, but that it would proceed carefully given uncertainties.

Why the bank moved

CPI inflation has been around 3% since April because of persistently high oil prices, and the bank expects it to reach about 3.5% by the end of 2026. Excluding gasoline, inflation was 2.2% in September, and core inflation measures remain close to 2%.

The bank said cost pressures are building, with high fuel prices raising production and transportation costs. Its surveys suggest businesses will pass on more of those costs over the next year. The statement notes that the conflict in the Middle East is in its eighth month with no clear path to resolution.

Governor Tiff Macklem told reporters that "an increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation." Reuters reported that the rate remains below the neutral level, which neither restrains nor stimulates the economy.

The new forecasts

The bank published new projections in its quarterly Monetary Policy Report on Oct 28. Growth was 3.3% annualized in the second quarter and about 2% in the third, stronger than the bank expected in July. New US tariffs are expected to slow growth to 0.8% in the fourth quarter before a pickup in 2027.

The bank expects inflation to return to its 2% target in the middle of 2028. Unemployment has been around 6.5% for several months.

Who is exposed

Canada's major banks, including Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Scotiabank and Canadian Imperial Bank of Commerce, had a prime lending rate of 4.45% going into the decision, according to mortgage broker nesto. Prime typically moves in step with the Bank of Canada's rate and sets the cost of variable-rate mortgages and home equity lines of credit.

Canadian Mortgage Trends reported that lenders are expected to raise their prime rates following the decision, which increases payments for adjustable-rate mortgage borrowers. Fixed mortgage rates had already risen in September as five-year Government of Canada bond yields climbed, Mortgage Professional America reported.

Economists who opposed a hike pointed to core inflation near 2%, US trade tensions and a weak job market, Reuters reported.

What comes next

• The US Federal Reserve was scheduled to announce its own rate decision at 2 p.m. Eastern time on Oct 28, with its target range at 3.75% to 4% after a hike in September.
• The Bank of Canada's next rate announcement is on Dec 9, 2026.
• Its next Monetary Policy Report is due on Jan 27, 2027.