Bank of Canada raises rate to 2.5%, first hike since 2023

The Bank of Canada raised its key policy rate by a quarter of a percentage point to 2.5 per cent on Oct. 28, its first increase since July 2023, saying higher energy prices risk spreading to the cost of other goods and services.

Governor Tiff Macklem said in prepared remarks that the outlook for inflation has “deteriorated” since the bank’s July report. “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,” he said, according to a BNN Bloomberg report.

The bank’s statement left the door open to more. “There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully,” the bank said, as quoted in a TD Stories summary of the decision.

Inflation is currently at 3.1 per cent, BNN Bloomberg reported. Our own look at the latest numbers is in the September inflation report.

The bank’s October Monetary Policy Report, as described by BNN Bloomberg, said Brent crude oil averaged $124.96 US a barrel in October, about $35 more than in July. It named energy prices and uncertainty over Canada’s trade relationship with the United States as the two biggest risks to the cost of living.

High energy costs have not yet spread broadly to other prices, the report said, but cost pressures are building and businesses expect to pass more of their increased costs on to customers. About 60 per cent of consumer-facing businesses surveyed expect to do so within 12 months.

The economy grew 3.3 per cent in the second quarter and is expected to slow to two per cent in the third, with a further slowdown in the fourth quarter as new U.S. tariffs weigh on activity, according to the report. It expects the economy to decline in the next few months before rebounding in 2027. Unemployment has hovered around 6.5 per cent in recent months.

For borrowers, the policy rate is a benchmark lenders use to set rates on loans and mortgages, TD said. People with variable-rate mortgages or lines of credit could see their rates move with the bank’s decisions, while fixed-rate mortgages are locked in for the term and are not affected by the announcement. Check with your lender for how and when your own rate changes.

Marc Ercolao, an economist at TD, said another quarter-point increase is likely but that the bank will be careful not to overdo it. He said that would bring the rate to 2.75 per cent, in the middle of the bank’s neutral range. That is his view, not the bank’s. The bank publishes its decision schedule and full statement on the Bank of Canada website.

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