Bank of Canada raises key interest rate for first time in three years

By the Editorial Team · Thursday, October 29, 2026

The Bank of Canada raised its policy interest rate by 25 basis points to 2.5%, the first increase in over three years, aiming to curb inflation driven by rising energy costs. The central bank indicated that additional rate hikes might be needed as inflation is projected to remain elevated above target through 2024, while GDP growth forecasts were also revised upward.

The Bank of Canada raised its key policy interest rate by 25 basis points to 2.5% on Wednesday, marking the first increase in more than three years. The central bank signaled that further hikes could be necessary to address inflationary pressures driven primarily by rising energy costs.

Governor Tiff Macklem explained that the decision was motivated by sustained inflation well above the Bank’s target range of 1% to 3%, which reached 3.2% in September. Energy prices and related transportation costs were identified as the main contributors to this elevated inflation. The bank revised its inflation forecast for 2027 upward to 3.1%, from an earlier estimate of 2.0%, while GDP growth projections for the current year were also increased to 1.0% from 0.7%.

“An increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation,” Macklem said. He added that while additional rate hikes may be required, the central bank would proceed cautiously amid ongoing uncertainties, including trade tensions with the United States and geopolitical developments in the Middle East.

The recent rate hike is the first since July 2023 and the initial move after a year-long pause. Despite the increase, the policy rate remains below the Bank of Canada’s estimated neutral midpoint of 2.75%, which is considered neither restrictive nor accommodative to economic growth.

Some economists expressed reservations about the decision, noting that core inflation—which excludes volatile items such as energy—remains near 2%. They cautioned that further rate increases could hinder the modest economic recovery amid persistent US trade challenges and a soft labor market. Andrew Grantham, senior economist at CIBC Capital Markets, suggested that if global energy prices stabilize, the policy rate might not need to exceed 2.75%.

The Bank of Canada’s updated forecast anticipates inflation will peak near 3.5% by the end of this year, then hover around 3% throughout most of 2024, before returning closer to the 2% target by mid-2028. The central bank also adjusted its GDP outlook, projecting growth of 2% for both 2027 and 2028, slightly higher than its previous estimates, reflecting expectations of stronger consumer spending, increased exports, and business investment.

After robust economic growth of 3.3% in the second quarter, the bank anticipates a slowdown to approximately 2% growth in the third quarter and further deceleration to 0.8% in the fourth quarter.

Following the announcement, the Canadian dollar strengthened marginally, trading at about C$1.4050 to the US dollar.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.