The Bank of Canada sharply raised its inflation forecasts on Wednesday as it lifted interest rates, warning that prices will rise faster for longer than it expected only three months ago. In its October Monetary Policy Report, the Bank now sees consumer price inflation averaging 2.9 percent in 2026 and 3.1 percent in 2027 — up from the 2.5 percent and 2.0 percent it forecast for those years in July — and 2.2 percent in 2028, against 2.1 percent in July. Those figures are annual averages for each year, not year-end rates: the Bank's quarterly path still has inflation ending this year at about 3.5 percent, staying above 3 percent through much of 2027 and returning close to the 2 percent target only by the middle of 2028.
The revision is driven above all by energy. The Bank says inflation was revised up because of higher and more persistent energy prices, as well as higher non-energy import prices. Consumer prices have risen at around 3 percent since April, above the 2 percent target, as high oil prices — pushed up by the war in the Middle East, now in its eighth month — feed through the economy. Inflation excluding gasoline was 2.2 percent in September and core measures remain close to 2 percent, but cost pressures are building: fuel is raising production and transportation costs, imported industrial and electronics input prices have increased, and the Bank's surveys suggest businesses that have so far absorbed those costs will pass more of them on to customers over the next year. In its statement, the Bank said Governing Council decided to raise the rate "to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services."
The rate move itself was a quarter point: the Bank increased the target for the overnight rate to 2.50 percent from 2.25 percent — the first increase since July 2023 and the first change of any kind since the Bank cut rates in October 2025. The Bank Rate rose to 2.75 percent and the deposit rate to 2.45 percent. After a year of holding borrowing costs steady, the central bank decided inflation had become too persistent to ignore — and that waiting was the bigger risk.
Governor Tiff Macklem laid out the reasoning at his press conference. He told reporters the decision had been a judgment call — "Governing Council considered two policy options: hold or hike" — and that the case for holding rested on inflation being concentrated in energy, core inflation near 2 percent, and the slack still in the economy. The case for moving won: energy prices are higher and expected to stay higher for longer, and the longer they do, the more likely their costs are to "spill over and become generalized inflation." Macklem stressed this is not the start of an automatic series of increases. The Bank said in its statement: "There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully," and Macklem said future decisions will be taken one meeting at a time.
The Bank's growth forecasts were also revised up. The economy has proved stronger than the Bank expected: output grew 3.3 percent in the second quarter and indicators point to growth of about 2 percent in the third, consumer spending has been solid, and business investment has rebounded. The Bank now sees growth of 1 percent in 2026 — up from 0.7 percent in July — and 2 percent in both 2027 and 2028. The worries are real, too — unemployment has sat around 6.5 percent for several months, some slack remains in the economy, and new U.S. tariffs are expected to slow growth in the fourth quarter before activity picks up again in 2027, with housing still weak.
For households, the decision lands quickly. Canada's big lenders are expected to raise their prime rates in step with the Bank, lifting payments right away for variable-rate mortgage holders and raising interest costs on home equity lines of credit and other loans tied to prime. Industry estimates put the added cost of a quarter-point increase at roughly $85 a month on a $600,000 variable-rate mortgage. Fixed-rate borrowers feel nothing until renewal, but fixed mortgage rates have already been climbing for weeks because they follow bond yields, which rose as markets grew convinced the Bank would move.
Markets had largely seen the increase coming. Swaps traders had put the odds of a hike as high as about 85 percent before the decision, after Macklem warned earlier this month that the Bank's inflation forecasts would be revised higher on oil prices, and a survey of economists found a bare majority — 19 of 34 — expecting the move, most of them expecting one more increase by March. The Canadian dollar had already strengthened in the run-up — the U.S. dollar down from a 2026 high of about $1.4271 Canadian on October 9 to around $1.40 this week — and the Bank noted the loonie has recovered to around 71 U.S. cents. Analysts call it a defensive hike against an energy shock, not the opening of a long tightening campaign, and say the loonie's next move may depend as much on the Federal Reserve as on Ottawa.
Not everyone agreed the Bank needed to move now. CIBC's chief economist, Avery Shenfeld, had warned a day earlier that an increase could prove premature, saying a delay until December or January would give the Bank more time to assess energy prices and Canada-U.S. trade relations, and his team was not yet sure any increases would be warranted in the coming year. BMO strategist Benjamin Reitzes took the opposite view of the Bank's thinking, saying policymakers would rather make the mistake of hiking a little too early than fall behind the curve, as happened in 2021 and 2022, and have to hike much more later. The Bank's next decision is scheduled for December 9.
The timing also puts Canada a step ahead of the United States. The Federal Reserve announces its own decision later on Wednesday, at 18:00 UTC, and is widely expected to leave U.S. rates unchanged at 3.75 to 4.00 percent under Chairman Kevin Warsh, with markets instead pricing a further U.S. increase in December. Ottawa has moved first, and moved up — driven by an inflation problem made in large part by war-driven energy prices, and by a determination not to let those prices set the price of everything else.
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