BoC Ends Rate Hold Streak, Hikes to 2.5%

The Bank of Canada raised its benchmark interest rate by 25 basis points to 2.50% on October 28 marking its first rate hike in three years after seven consecutive holds.

The decision matched market expectations as policymakers responded to persistent inflation pressures, particularly from high energy prices.

Inflation Risks Drive the Rate Hike

Canada's annual inflation reached 3.1% in September, while higher energy costs continued to increase production and transportation expenses. Businesses have largely absorbed these costs, but the Bank expects more price increases to reach consumers over the coming year. Policymakers warned that prolonged energy price pressures could spread across the economy and indicated that further rate hikes may be necessary, although they plan to proceed carefully.

Inflation Forecasts Point to a Longer Recovery

The Bank expects inflation to reach approximately 3.5% by the end of 2026 and average 3% in 2027, one percentage point above its July forecast. Inflation is projected to return to the 2% target by mid-2028, as persistent energy costs and rising business expenses extend the period of higher prices.

Canadian Growth Outlook Improves

Canada's economy has performed better than previously forecast, with GDP expanding 3.3% in the second quarter and estimated growth of around 2% in the third quarter.

The Bank projects economic growth of 1% in 2026 and 2% in both 2027 and 2028, supported by consumer spending, business investment, and exports. Still, US tariffs could slow growth toward year-end, while unemployment remains around 6.5%.

What's Next for the Canadian Dollar?

Further monetary tightening could support the Canadian dollar, particularly through interest rate differentials with other major economies. Higher borrowing costs could also weigh on household spending and investment. Future policy decisions will depend on inflation trends, energy prices, and economic activity, with upcoming data providing further guidance on the possibility of additional rate increases.