OTTAWA — The Bank of Canada has raised its key interest rate by 25 basis points to 2.5%, citing persistent inflation pressures from high energy prices and rising business costs.
The Bank Rate now stands at 2.75%, while the deposit rate is 2.45%.
Inflation has remained around 3% since April and is expected to rise to 3.5% by the end of 2026, prompting the Bank to act despite signs of stronger economic growth.
Growth Strengthens, but Trade Risks Remain
Canada’s economy grew by 3.3% in the second quarter, with growth estimated at about 2% in the third quarter. Consumer spending, business investment and exports have supported activity, despite continued weakness in sectors affected by US tariffs.
The economy is forecast to grow by 1% in 2026 and 2% in both 2027 and 2028. Growth is expected to slow in the final quarter of this year before recovering in 2027, supported by investment, exports and government spending.
However, the unemployment rate has remained near 6.5%, and uncertainty over Canada-US trade relations continues to weigh on the outlook.
Energy Prices Drive Inflation Concerns
While inflation excluding gasoline was 2.2% in September, higher fuel, transportation and imported input costs threaten to push prices higher. Businesses may pass more of these costs on to consumers over the coming year.
The Bank expects inflation to average 3% in 2027 before returning to its 2% target by mid-2028. The prolonged Middle East conflict and uncertainty over energy prices remain key risks.
More Rate Hikes Possible
The Bank said the rate increase aims to prevent higher energy costs from spreading across the wider economy. It warned that further increases may be needed but stressed that future decisions will depend on incoming economic data and evolving risks.
The next interest rate announcement is scheduled for December 9, 2026, followed by the next Monetary Policy Report on January 27, 2027.
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