Bank of Canada raises key interest rate to 2.5%
The quarter-point increase is the first in more than three years. The bank warns that high energy costs could push up other prices and says further increases might be needed.
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The quarter-point increase is the first in more than three years. The bank warns that high energy costs could push up other prices and says further increases might be needed.
The Bank of Canada raised its key interest rate from 2.25% to 2.5% on 28 October 2026. It also raised its forecasts for inflation in 2027 and economic growth in 2026 compared with its July outlook.
The increase of 25 basis points—0.25 percentage points—was the first in more than three years. It followed a period of cuts: in 2024, the bank lowered its key rate five consecutive times, from 5% in June to 3.25% in December.
The bank expects inflation to remain above its 2% target until the middle of 2028. Its statement projects average consumer price inflation—the rate at which consumer prices rise—of 3% in 2027. Al Jazeera gave the revised 2027 forecast as 3.1%. Both figures compare with a July projection of 2%.
| Measure | Period | Forecast |
|---|---|---|
| Consumer price inflation | End of 2026 | About 3.5% |
| Consumer price inflation | 2027 | 3% annual average in the bank’s statement; 3.1% in Al Jazeera’s account; July forecast: 2% |
| Consumer price inflation |
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| Middle of 2028 |
| 2% |
| Economic growth | 2026 | 1%, up from 0.7% in July |
| Economic growth | 2027 | 2%, up from 1.8% in July |
| Economic growth | 2028 | 2%, up from 1.8% in July |
The bank said its growth outlook remained considerably uncertain, particularly because of Canada-US trade relations. Governor Tiff Macklem said new US tariffs would slow the economy in the fourth quarter, but he expected growth to pick up in 2027 as consumer spending continued, exports recovered and business investment strengthened.
Macklem said the rate increase was intended to reduce the risk that higher energy prices spread into the prices of other goods and services. Businesses passing increased costs on to customers would make inflation more persistent.
In its 28 October statement, the bank said fuel was raising production and transportation costs. Businesses had mostly absorbed higher costs, but its surveys suggested they would pass more on to customers over the next year. The bank also cited recovering economic growth in explaining its decision.
The bank said persistently high oil prices had kept consumer price inflation around 3% since April. Excluding gasoline, inflation was 2.2% in September, while measures of core inflation, which strip out volatile price changes, remained close to 2%. Households’ and businesses’ short-term inflation expectations had risen, while longer-term expectations remained stable.
Economists who opposed the increase pointed to core inflation near 2%. They said higher rates could impede a modest economic recovery amid US trade tensions and a weak job market.
The Canadian dollar was flat at C$1.405 per US dollar. Marc Chandler, chief market strategist at Bannockburn Global Forex, said the increase had been expected and the currency had reacted little, Reuters said.
The bank identified developments in the Middle East conflict and businesses’ responses to rising costs as the main uncertainties in its inflation forecast. Macklem said further rate increases might be needed, but the bank would proceed carefully.
The bank’s next interest-rate decision is scheduled for 9 December.
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