The Bank of Canada raised its interest rate by a quarter of a percentage point to 2.50% as most economists expected, its first increase since 2023, saying persistently high energy prices risk spreading to the prices of other goods and services. Key takeaways from Governor Macklem’s statement:
The BOC raised its rate to 2.50%, ending a run of seven consecutive holds at 2.25% and marking the first change to its policy rate in a year.
Inflation rose to 3.1% in September from 3.0% in August, driven largely by energy. Excluding gasoline, inflation was 2.2% and core measures remain close to 2%, but the Bank expects headline inflation to reach about 3.5% by year end as higher fuel costs raise production and transportation costs.
Growth has been stronger than expected. The economy grew at a 3.3% annualized pace in the second quarter, and recent indicators point to about 2% in the third. The updated Monetary Policy Report projects growth of 1% in 2026 and 2% in both 2027 and 2028, up from 0.7% and 1.8% in July. Inflation is now expected to average 3% in 2027, a full point above the July forecast, before returning to 2% by mid-2028.
On trade, the Bank expects new US tariffs to slow growth in the fourth quarter before a rebound in 2027. Sectors hit by tariffs remain weak, but exports overall have strengthened on robust US demand and signs that businesses are adapting. The Bank said its outlook remains subject to considerable uncertainty, particularly around Canada-US trade relations.
Macklem said Governing Council weighed two options: hold or hike. The case for holding was that price increases have so far been concentrated in energy and energy-heavy services such as airfares, while slack remains in the economy and new tariffs will weigh on growth. The case for raising was that energy prices are expected to stay higher for longer, cost pressures are building, and Bank surveys suggest businesses will pass more of those costs on to consumers over the next year.
Governor Macklem stated that Governing Council agreed “risks to inflation had increased and there was less scope for monetary accommodation.” Looking ahead, the Bank will take decisions one meeting at a time, saying further increases could be needed but that it will proceed carefully given the uncertainties.
The Bank of Canada will make its next interest rate decision on December 9th