Bank of Canada hikes rate to 2.5 percent, warns of more increases

The Bank of Canada raised its key interest rate by 0.25 percent on Wednesday, moving the benchmark to 2.5 percent. This marks the first increase in the central bank's policy rate since July 2023. Governor Tiff Macklem stated that the move was necessary to prevent high energy prices from spreading into general inflation.

The decision follows a period of stable rates. The central bank had held its policy rate steady for over three years before this adjustment. Macklem noted that the economy showed resilience, making an increase required to reduce inflation risks.

Inflation data revealed that the annual rate reached 3.2 percent in September. This figure sits above the bank's target range of 1 to 3 percent. Energy costs and related transportation expenses drove nearly the entire increase. The bank now projects inflation will end this year at 3.5 percent.

Macklem explained that inflation is expected to hover near 3 percent for most of 2027. He said the rate should return close to the 2 percent target by mid-2028. The central bank upgraded its inflation forecast for 2027 to 3.1 percent, up from the 2 percent predicted in July.

The bank’s new monetary policy report projects economic growth of 1 percent for this year. This is higher than the 0.7 percent growth estimated in July. The report also raised GDP forecasts for 2027 and 2028 to 2 percent each, up from previous estimates of 1.8 percent.

Economists hold differing views on the impact of the hike. Andrew Grantham, a senior economist at CIBC Capital Markets, said core inflation will not accelerate as much as the bank fears. He predicted the policy rate will not need to exceed 2.75 percent if global energy prices ease.

Other economists argue that core inflation remains near 2 percent. They contend that raising rates could slow a modest economic recovery, especially with US trade tensions and a weak job market. Macklem said new US tariffs will slow the economy in the fourth quarter but expects growth to pick up in 2027.

The bank’s next rate decision is scheduled for December 9. Money markets currently price in another 25 basis point increase in January, with the benchmark rate potentially reaching 3.25 percent by December next year.