Bank of Canada Raises Key Rate to 2.5% in First Hike Since 2023

The Bank of Canada raised its key interest rate on Wednesday, the first increase in more than three years. The policy rate rose by a quarter of a percentage point, to 2.5 percent.

The move was widely expected. Nineteen of 34 economists surveyed by Reuters ahead of the decision had predicted a quarter-point hike. It is the bank's first rate increase since July 2023 and its first policy change in a year.

Governor Tiff Macklem said the decision came down to inflation. The annual rate hit 3.2 percent in September, above the bank's 1 to 3 percent target range. Energy costs drove almost all of it.

"With the outlook for inflation substantially higher and the economy showing resilience, 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 in opening remarks to reporters.

The bank now expects inflation to end 2026 at 3.5 percent and stay around 3 percent for most of 2027 before returning close to the 2 percent target by the middle of 2028. Its forecast for 2027 inflation rose to 3.1 percent, up from 2.0 percent in its July report.

Growth forecasts moved up too. The bank expects the economy to grow 1.0 percent this year, up from 0.7 percent in July, and 2 percent in both 2027 and 2028, up from 1.8 percent. Growth was a robust 3.3 percent annualized in the second quarter, but the bank expects it to slow to 2 percent in the third quarter and 0.8 percent in the fourth as new U.S. tariffs bite.

Macklem said the bank's surveys show businesses have largely absorbed higher costs so far, but more of those costs are likely to reach consumers over the next year. "The combination of higher energy prices and pass-through increases the persistence of inflation," he said.

Not every economist agreed with the hike. Some who opposed it pointed to core inflation, which strips out volatile items and is still hovering around 2 percent. They also warned a higher rate could slow a modest recovery already pressured by U.S. trade tensions and a weak job market.

Macklem acknowledged the uncertainty. The war in the Middle East has kept global oil prices high, and the trade dispute with the United States remains unresolved. "There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully," he said.

The bank also set its Bank Rate at 2.75 percent and its deposit rate at 2.45 percent. The Canadian dollar firmed slightly after the announcement, trading at C$1.4050 to the U.S. dollar. The bank's next rate decision is December 9.