The Bank of Canada has raised its key interest rate for the first time in more than three years, lifting it by a quarter point to 2.5 percent and warning that further increases may be needed to stop soaring energy costs from driving broader inflation.
Wednesday's hike, which was widely expected, came with the bank raising its inflation forecast for 2027 to 3.1 percent from the 2 percent it predicted in July. It now expects growth this year of 1 percent, up from 0.7 percent. Annual inflation hit 3.2 percent in September, above the bank's 1 to 3 percent target range, driven almost solely by higher energy and energy-related transportation costs.
Governor Tiff Macklem said the increase was needed to reduce the risk that elevated energy prices could spill over and become generalised inflation. "There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully," he said. He said inflation was expected to end the year at 3.5 percent, stay at around 3 percent for most of 2027, and return close to the 2 percent target by the middle of 2028.
Not all economists agreed. Andrew Grantham, senior economist at CIBC Capital Markets, said: "We don't expect that core measures of inflation will accelerate as much as the bank fears, particularly if global energy prices ease a little, and as a result we don't think that the policy rate will need to move above 2.75 percent." Economists who opposed the rise said core inflation, which strips out the cost of volatile items, is still hovering at about 2 percent, and a rate hike could impede a modest economic recovery given US trade tensions and a weak job market.
Macklem said new US tariffs would slow the economy in the fourth quarter, but expressed confidence that growth would pick up again in 2027 as consumer spending continues, exports pick up and business investment strengthens. The bank's monetary policy report projects growth slowing to 2 percent in the third quarter and 0.8 percent in the fourth quarter, after annualised growth of 3.3 percent in the second quarter. It upgraded its GDP forecasts for 2027 and 2028 to 2 percent from 1.8 percent.
Money markets are pricing in another 25 basis point rate cut in January and see the benchmark rate going up to 3.25 percent by December next year. The bank's next rate decision is on December 9.
Analysis
Why This Matters
- The first rate hike in more than three years marks a turn in monetary policy as energy-driven inflation runs above the bank's target.
- The move will raise borrowing costs for Canadian households and businesses, with the bank warning that further increases are possible.
- The December 9 decision will signal how much further the tightening cycle may go.
Background
Central banks adjust their policy rates to influence borrowing costs and keep inflation within a target range. The Bank of Canada targets inflation of 1 to 3 percent and had not raised its rate since July 2023. The current hike responds to inflation that reached 3.2 percent in September, driven almost solely by energy and energy-related transportation costs, and follows a period of economic resilience.
Key Perspectives
Tiff Macklem, Bank of Canada governor: said the increase is needed to reduce the risk that elevated energy prices spill over and become generalised inflation, and further increases may be needed, though the bank will proceed carefully given uncertainties.
Andrew Grantham, senior economist at CIBC Capital Markets: said core measures of inflation are unlikely to accelerate as much as the bank fears, particularly if global energy prices ease, and the policy rate may not need to move above 2.75 percent.
Economists opposed to the rise: said core inflation is still hovering at about 2 percent and a rate hike could impede the modest economic recovery, given US trade tensions and a weak job market.
What to Watch
- The Bank of Canada's next rate decision on December 9.
- Whether inflation follows the projected path to 3.5 percent by year-end and around 3 percent through most of 2027.
- Developments in US trade tensions and the Middle East conflict, which Macklem cited as sources of uncertainty.
Checked
12 claims in this story checked against 1 source: 10 supported.
Show each claim
- Partly supportedThe Bank of Canada warned that further rate increases may be needed.Al Jazeera – Breaking News, World News and Video from Al Jazeera: “warned that further increases might be needed to prevent soaring energy costs from fueling broader inflation.”
- SupportedThis was the Bank of Canada’s first rate increase in more than three years.Al Jazeera – Breaking News, World News and Video from Al Jazeera: “The Bank of Canada (BoC) has raised its key interest rate for the first time in more than three years”
- SupportedThe quarter-point hike took the key rate to 2.5 percent.Al Jazeera – Breaking News, World News and Video from Al Jazeera: “Wednesday’s quarter-point hike to 2.5 percent was widely expected”
- SupportedHigher energy costs drove inflation above the bank’s target range.Al Jazeera – Breaking News, World News and Video from Al Jazeera: “The annual inflation rate hit 3.2 percent in September, above the bank’s 1 to 3 percent target range, and was driven almost solely by higher energy and energy-related transportation costs.”
- SupportedMacklem said further rate increases might be needed, but the bank would proceed carefully.Al Jazeera – Breaking News, World News and Video from Al Jazeera: ““There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully,” he added.”
- SupportedThe bank raised its 2027 inflation forecast to 3.1 percent from 2 percent in July.Al Jazeera – Breaking News, World News and Video from Al Jazeera: “the bank also ramped up its inflation forecast for 2027 to 3.1 percent from the 2 percent it had predicted in July.”
- SupportedGrantham said core inflation might not accelerate as much as the bank fears and the policy rate would not need to exceed 2.75 percent.Al Jazeera – Breaking News, World News and Video from Al Jazeera: ““We don’t expect that core measures of inflation will accelerate as much as the bank fears, particularly if global energy prices ease a little, and as a result we don’t think that the policy rate will need to move above 2.75 percent,” said Andrew Grantham”
- Not in the sourcesNot all economists agreed.Al Jazeera – Breaking News, World News and Video from Al Jazeera: ““We don’t expect that core measures of inflation will accelerate as much as the bank fears, particularly if global energy prices ease a little, and as a result we don’t think that the policy rate will need to move above 2.75 percent,” said Andrew Grantham”
- SupportedEconomists who opposed a rate rise said core inflation was about 2 percent and a hike could impede recovery.Al Jazeera – Breaking News, World News and Video from Al Jazeera: “Economists who opposed a rise said core inflation, which strips out the cost of volatile items, is still hovering at about 2 percent. They also say a rate hike could impede modest economic recovery, given US trade tensions and a weak job market.”
- SupportedMacklem said new US tariffs would slow the economy in the fourth quarter.Al Jazeera – Breaking News, World News and Video from Al Jazeera: “Macklem said new US tariffs would slow the economy in the fourth quarter”
- SupportedThe report projected growth of 2 percent in the third quarter and 0.8 percent in the fourth, after annualised second-quarter growth of 3.3 percent.Al Jazeera – Breaking News, World News and Video from Al Jazeera: “After a robust annualised growth of 3.3 percent in the second quarter, the economy is likely to slow to 2 percent in the third quarter and further down to 0.8 percent in the fourth quarter, the BoC’s new monetary policy report projected.”
- SupportedMoney markets expect another 25-basis-point rate cut in January and a benchmark rate of 3.25 percent by December next year.Al Jazeera – Breaking News, World News and Video from Al Jazeera: “Money markets are pricing in another 25 basis point rate cut in January and see the benchmark rate going up to 3.25 percent by December next year.”
