The Bank of Canada raised its overnight rate by a quarter of a percentage point to 2.5 percent on 28 October, its first increase since 2023. It aims to limit the spread of high energy costs to other prices. The bank’s revised outlook puts inflation’s return to 2 percent in mid-2028. Further rate increases could be needed.
Economics & Markets··Night
First rate increase since July 2023
The Bank of Canada raised its overnight interest-rate target by 25 basis points to 2.5 percent on 28 October. This was its first increase since July 2023 and its first change in a year. The target had stood at 2.25 percent since October 2025, when it was reduced from 2.5 percent. Governor Tiff Macklem said the bank wanted to prevent expensive energy from spreading into the prices of other goods and services.[1], [2]
The Bank Rate rose to 2.75 percent and the deposit rate to 2.45 percent. Macklem acknowledged that higher rates would initially be uncomfortable for households and businesses. Governing Council said further increases could be needed, while agreeing to proceed carefully amid uncertainty.[1], [2]
Energy costs lengthen the projected inflation path
Consumer inflation was 3.1 percent in September and had been around 3 percent since April. The bank expects about 3.5 percent at year-end. Excluding gasoline, September inflation was 2.2 percent, while core measures stayed close to 2 percent. The bank said high fuel prices were increasing production and transport costs; imported industrial and electronics inputs had also become more expensive.[1], [2]
Businesses had largely absorbed those increases so far, but bank surveys suggested greater pass-through into selling prices over the following year. The bank projected average inflation of 3 percent in 2027 and a return to 2 percent in mid-2028. It identified Middle East developments and businesses’ responses to cost pressures as major uncertainties around that forecast.[1]
Growth improved before another tariff-related slowdown
Canada’s economy grew 3.3 percent in the second quarter; recent indicators pointed to about 2 percent in the third. Consumer spending remained solid and business investment recovered through oil, gas, machinery and equipment spending. Exports strengthened overall despite weakness in sectors exposed to US tariffs. Unemployment had stayed around 6.5 percent for several months, and the bank still saw some excess supply.[1]
The bank expects new US tariffs to slow growth in the fourth quarter. Its annual projections put growth at 1 percent in 2026 and 2 percent in each of 2027 and 2028. It described that overall outlook as stronger than in July, while stressing considerable uncertainty over Canada–US trade relations.[1]
