Bank of Canada raises key policy rate to 2.5% on October 28
The Bank of Canada raised its key policy rate by 25 basis points to 2.5% on October 28, 2026, marking its first increase in more than three years, as reported by Reuters. Governor Tiff Macklem stated that further hikes may be necessary to prevent rising energy costs from driving broader, persistent inflation across the economy.
Central Bank Raises Inflation Forecast Amid Energy Costs
The central bank ramped up its inflation forecast for 2027 to 3.1%, up from the 2.0% prediction made in July. Annual inflation hit 3.2% in September, sitting above the bank’s target range of 1% to 3%. Macklem noted that the increase was almost solely driven by higher energy and transportation costs, warning that cost pass-through will likely increase over the next year.
Bank of Canada raises the policy rate by 25 basis points to 2½%https://t.co/BjYoo4p2vY#economy #cdnecon
Growth for 2026 is projected at 1.0%, an upward revision from the 0.7% seen in July. However, the economy is expected to slow from an annualized 3.3% in the second quarter down to 2% in the third quarter and 0.8% in the fourth quarter, weighed down by new United States tariffs.
Mixed Economic Signals Follow Rate Decision
The rate decision arrived amid mixed economic signals. Commentary noted that September consumer price index data came in hot at 3.1%, while the economy lost about 68,000 jobs and unemployment sat at 6.5%. Economists who opposed the hike argued that core inflation remains near 2% and that higher borrowing costs could impede a modest recovery while households shoulder heavy debt loads.
The Canadian dollar firmed slightly following the announcement, trading at C$1.4050 to the U.S. dollar, or 71.17 U.S. cents. Meanwhile, business investment plans remain strong despite trade uncertainties, with firms reporting intentions to invest in digital technologies, automation, and AI tools to improve efficiency, according to the Bank of Canada's Business Outlook Survey.
Upcoming Policy Decisions
While officials expressed confidence that consumer spending, exports, and business investment will strengthen economic growth in 2027, the central bank cautioned that risks to inflation have increased and the scope for monetary accommodation has narrowed.