Bank of Canada Raises Rates for 1st Time Since 2023

The Bank of Canada raised its benchmark policy rate by 25bps to 2.5% in October 2026, the first increase in three years and in line with market expectations. Policymakers said the decision aims to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services while noting that there could be a need to increase the policy rate further, although cautious is necessary. The central bank also noted that inflation is higher and more persistent than in the July Report. Growth has picked up this year and is expected to recover further. Policymakers remain committed to maintaining Canadians’ confidence in price stability. CPI inflation is expected to average 3% in 2027, a percentage point above the July projection, then come down to 2% in the middle of 2028. The Canadian economy is expected to grow 1% in 2026, and 2% in 2027 and 2028. This is a somewhat stronger overall growth projection than the July Report.

The Bank of Canada maintained the target for its overnight rate unchanged at 2.25% in its September 2026 decision, as expected by markets, but flagged stronger upside risks to inflation. The Governing Council noted that the Canadian economy underwent a broad recovery in the second quarter, underscoring some resilience to adverse economic conditions since the outbreak of war in the Middle East lifted energy prices and long-maturity yields domestically. On top of that, flagged upside inflation risks from the continuation of the war and the reintroduction of aggressive tariffs on Canadian exports to the United States. Still, the BoC noted that underlying inflation has so far maintained its target level despite the shock in energy prices since March. Despite stressing higher inflation risks, the bank reiterated that the uncertain outlook prevents any clear signals on monetary policy this year.

The Bank of Canada left the target for its overnight rate unchanged at 2.25% for a sixth consecutive decision in July 2026, in light with expectations. The Governing Council noted that Canada's economy has shows signs of improvement in the last months despite being dented by the immediate impact of soaring energy prices from the Middle East conflict. The Council added that it is unlikely that economic growth will be remain at its elevated pace for long, but noted that the sources of expansion are broadening. New projections have Canada's GDP growth slowing to 2.75% this year, before rebounding to 3.25% next year. In the meantime, inflation is also due to slow as the pressure from the energy shock eases, although geopolitical uncertainty holds the unpredictable outlook, warranting no change in monetary conditions. The BoC's base case sees CPI inflation to stay above the 3% threshold in June and ease in the coming months, before converging to 2% by next year.