Bank of Canada raises rate to 2.5% as energy costs lift inflation risk
The central bank made its first rate increase in more than three years and said further increases may be needed if energy costs spread into broader prices.
The Bank of Canada raised its key interest rate by a quarter point to 2.5% on Wednesday, October 28, its first increase in more than three years, according to Reuters. The decision could increase borrowing costs for Canadians with variable-rate debt as the bank tries to prevent higher energy prices from feeding into broader inflation.
Governor Tiff Macklem said the increase was needed because the inflation outlook had worsened while the economy remained resilient. ‘There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully,’ he said, according to Reuters.
Why the Bank of Canada raised rates
Canada's annual inflation rate reached 3.2% in September, above the bank's 1% to 3% target range, Reuters reported. Higher energy prices and energy-related transportation costs accounted for almost all of the increase. Macklem said the bank wanted to reduce the risk that those costs would spread into prices across the economy.
The bank raised its forecast for 2027 inflation to 3.1%, from 2% in its July outlook, according to Reuters. Macklem said inflation was expected to reach 3.5% by the end of 2026 and stay around 3% for most of 2027 before returning close to the bank's 2% target by the middle of 2028.
What the increase means for borrowers
Higher interest rates can raise costs for people with variable-rate mortgages, lines of credit and other loans, Your Quad Counties reported. The effect on an individual borrower depends on the terms of their debt; the quarter-point increase describes the bank's policy rate, not a uniform change to every loan payment.
The decision came as policymakers weighed inflation against a modest economic recovery. Reuters reported that economists who opposed an increase pointed to core inflation around 2%, US trade tensions and a weak job market. Macklem said new US tariffs would slow growth in the fourth quarter, but expected consumer spending, exports and business investment to support growth in 2027.
Andrew Grantham, a senior economist at CIBC Capital Markets, expected core inflation to rise less than the bank feared, Reuters reported. He said the policy rate might not need to go above 2.75%, particularly if global energy prices eased. That assessment differs from the bank's concern that energy costs could become a more persistent source of inflation.
The Bank of Canada's next scheduled rate decision is December 9. Macklem has left open another increase, while saying policymakers will proceed carefully as they assess the inflation outlook.
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Sources and context
- Bank of Canada raises interest rates for the first time in three yearsReuters, published by Al Jazeera
- Bank of Canada raises interest rate, warns more hikes may be neededYour Quad Counties
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