The Bank of Canada has raised its benchmark interest rate for the first time in this announcement cycle, increasing its policy rate by 25 basis points to 2.5% on Wednesday as rising energy costs continue to put pressure on consumer prices.
Credit: Bank of Canada
The decision also brings the Bank Rate to 2.75% and the deposit rate to 2.45%.
The increase comes as inflation remains higher than the central bank would like. Canada’s Consumer Price Index (CPI) inflation has hovered around 3% since April, and the Bank now expects it to climb to approximately 3.5% by the end of 2026.
High oil prices are a major concern. They are making transportation and production more expensive, while imported industrial materials and electronics inputs are also costing businesses more.
So far, businesses have largely absorbed these additional expenses. However, Bank surveys suggest more of those costs will be passed on to consumers over the coming year.
What Happens to Interest Rates Next?
The Bank has left the door open to further increases, although it is not committing to another hike.
“There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully,” the Bank said.
The central bank is particularly concerned that prolonged high energy prices could lead to broader price increases across goods and services.
It now expects inflation to average 3% in 2027, a full percentage point higher than projected in July, before returning to 2% around the middle of 2028.
Canadian Economy Performing Better Than Expected
Despite inflation concerns, Canada’s economy has shown more resilience than anticipated.
GDP grew 3.3% in the second quarter, with growth estimated at approximately 2% in the third quarter. Consumer spending remained solid, while business investment and exports strengthened.
Unemployment has stayed around 6.5% for several months.
However, new US tariffs are expected to slow economic growth in the final quarter of 2026.
The Bank forecasts annual economic growth of 1% in 2026, followed by 2% in both 2027 and 2028. Housing activity is expected to remain relatively weak.
When Is the Next Interest Rate Announcement?
The Bank of Canada’s next scheduled interest rate decision is December 9, 2026.
Its next Monetary Policy Report will be released on January 27, 2027.