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

The Bank of Canada has raised its key interest rate for the first time in more than three years, lifting its target for the overnight rate by a quarter of a percentage point to 2.5% as persistently high energy prices threaten to push inflation more broadly through the economy.

The decision, announced on 28 October 2026, ends a long pause: it is the Bank’s first rate increase since July 2023 and follows seven consecutive decisions to leave the rate unchanged. The target had stood at 2.25% since October 2025. The Bank Rate is now 2.75% and the deposit rate 2.45%.

Why the Bank moved now

The Bank said the move was aimed at reducing the risk that continuing high energy prices spread broadly to the prices of other goods and services. With oil prices and refinery margins persistently elevated, consumer price inflation has been around 3% since April and is expected to rise to about 3.5% by the end of the year.

That headline figure hides a split the Bank itself highlighted. Excluding gasoline, inflation was 2.2% in September, and the Bank’s preferred measures of core inflation remain close to 2%. But cost pressures are building: high fuel prices are raising production and transport costs, imported industrial and electronics input prices have also risen, and Bank surveys suggest businesses, which have mostly absorbed higher costs so far, will pass more of them on over the next year. Near-term inflation expectations among households and businesses have risen, although longer-term expectations remain well anchored.

The Bank also pointed to a stronger-than-expected domestic economy. Growth picked up through the middle of the year, with gross domestic product rising 3.3% in the second quarter and recent indicators pointing to growth of about 2% in the third quarter. Consumer spending has been solid, business investment has rebounded on oil and gas activity and spending on machinery and equipment, and exports have strengthened despite weakness in sectors affected by United States tariffs. The unemployment rate has been around 6.5% for several months, and the Bank still sees some excess supply in the economy.

What the new outlook expects

The Bank now expects the Canadian economy to grow 1% in 2026 and 2% in both 2027 and 2028, a somewhat stronger overall projection than in its July report. Growth is expected to slow in the fourth quarter of 2026 as new United States tariffs bite, before picking up again in 2027, supported by business investment, exports and fiscal measures. Consumption growth is expected to moderate and housing to remain relatively weak.

On inflation, the Bank expects consumer prices to average 3% in 2027, a full percentage point above its July projection, before returning to 2% in the middle of 2028. The main uncertainties, it said, are developments in the Middle East, now in its eighth month of conflict with no clear path to resolution, and how businesses respond to cost pressures. Globally, the Bank revised up 2026 growth slightly to 3.1%, with 3.2% expected in 2027 and 2028, noting resilient activity in the United States and the euro area and a third-quarter rebound in China.

How markets reacted

Canadian bond yields rose after the announcement and the Canadian dollar edged higher. The two-year yield touched 3.441%, its highest since August 2024, before pulling back to 3.413%, while the 10-year yield rose 2.4 basis points to 3.885%. The loonie traded 0.1% higher at 1.4035 per US dollar, or 71.25 US cents.

Investors saw a 45% chance of a further increase in December and had fully priced in a second hike by January, according to swap market data reported after the decision. The Bank itself left the door open but hedged its language: there could be a need to increase the policy rate further, it said, but given the uncertainties, its Governing Council agreed to proceed carefully. Its next scheduled rate announcement is 9 December 2026.

A hawkish week for central banks

Canada’s move stood out in a week when other major central banks held steady. The United States Federal Reserve left its benchmark rate unchanged at 3.75% to 4% on 28 October, and the European Central Bank left its key rates unchanged on 29 October, with its deposit rate at 2.50%. The contrast underlines how the same energy shock is pulling policy in different directions: where Canada judged that the risk of inflation spreading had become too large to wait out, others chose to hold and watch incoming data.

What it means for borrowers

The decision matters most directly for Canadians with variable-rate borrowing. Bank lending rates and mortgage costs are likely to rise following the hike, and lenders typically adjust their prime rates after a Bank of Canada move, which feeds through to variable mortgages and home equity lines of credit. Existing fixed-rate mortgages are unaffected until renewal, when the rate on offer will reflect bond yields, which had already risen ahead of the decision.

That trade-off is at the heart of the Bank’s dilemma. Higher borrowing costs can restrain demand and keep inflation expectations in check, but they can also weigh on growth and add pressure to a labour market where unemployment is already around 6.5%. The Bank acknowledged both sides, saying it would weigh the risk of inflation staying high against the effect of higher borrowing costs on households and businesses, meeting by meeting.

FAKTA

• The Bank of Canada raised its target for the overnight rate by 25 basis points to 2.5% on 28 October 2026; the Bank Rate is 2.75% and the deposit rate 2.45%.
• It is the Bank’s first rate increase since July 2023, after seven consecutive decisions to hold; the target had been 2.25% since October 2025.
• Consumer inflation has been around 3% since April and is expected to reach about 3.5% by year-end and average 3% in 2027, before returning to 2% in mid-2028.
• Excluding gasoline, inflation was 2.2% in September and core inflation measures remain close to 2%.
• The Bank expects Canadian growth of 1% in 2026 and 2% in 2027 and 2028, with a fourth-quarter slowdown from new US tariffs.
• The next scheduled rate announcement is 9 December 2026; the Bank said further increases may be needed but it will proceed carefully.
• Market reaction: the Canadian two-year yield touched 3.441%, its highest since August 2024, and the loonie edged up to 1.4035 per US dollar.

Conclusion

After more than three years without a hike, the Bank of Canada has decided that waiting longer carried the greater risk. Energy-driven inflation, running near 3% since April, is now expected to stay above target through 2027, and the Bank moved to stop it spreading into wages and other prices. Whether this is a single precautionary step or the start of a longer tightening phase will depend on the data between now and 9 December, and on whether businesses pass their higher fuel and transport costs on to customers.

Frequently Asked Questions

What is Canada’s policy rate now?

2.50%, up from 2.25%, after a 25-basis-point increase on 28 October 2026.

Why did the Bank of Canada raise rates?

To reduce the risk that persistently high energy prices spread into broader inflation. Inflation has been around 3% since April, and the Bank expects it to reach about 3.5% by year-end.

When was the Bank’s last rate hike?

July 2023. The October 2026 move followed seven consecutive decisions to hold the rate unchanged.

What happens next?

The next scheduled announcement is 9 December 2026. The Bank said further increases may be needed, but it will proceed carefully and decide meeting by meeting.

Does the hike affect fixed mortgages?

Not during the term: an existing fixed rate stays the same until renewal. Variable-rate borrowing typically moves with lenders’ prime rates, which usually follow the Bank of Canada.

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