The Bank of Canada raised its target for the overnight rate by 25 basis points to 2.50 percent on Wednesday, with the Bank Rate at 2.75 percent and the deposit rate at 2.45 percent. It is the bank’s first increase since 2023, and it landed as markets had priced it: futures had moved to roughly a three in four chance of a hike, backed by 19 of 34 economists in the Reuters poll published last week.
The Monetary Policy Report explains a hike delivered into acknowledged slack. GDP grew 3.3 percent in the second quarter and indicators point to about 2 percent in the third, stronger than the July report expected, but the unemployment rate has sat around 6.5 percent for months and the bank still sees some excess supply. Growth is expected to slow in the fourth quarter on new US tariffs, and the bank projects 1 percent growth in 2026 and 2 percent in both 2027 and 2028.
Inflation is what moved the decision. CPI inflation has been around 3 percent since April and is expected to rise to about 3.5 percent by the end of the year, even though inflation excluding gasoline was 2.2 percent in September and core measures remain close to 2 percent. The bank’s concern is pass-through: high fuel prices are raising production and transport costs, imported input prices have risen, and its surveys suggest businesses will pass more of those costs on over the next year. It now expects CPI inflation to average 3 percent in 2027, a full percentage point above the July projection, before returning to 2 percent in mid 2028.
Governing Council said there could be a need to raise the rate further, but agreed to proceed carefully given the uncertainties, chiefly the Middle East conflict, now in its eighth month, and Canada US trade relations. The Canadian dollar has recovered to around 71 US cents, the level assumed in July. The next decision is December 9, and the bank’s framing makes it a pass-through test: if cost pass-through broadens as its surveys suggest, a second consecutive hike is the stated direction of risk.