Bank of Canada Raises Interest Rate to 2.5% in First Hike in More Than Three Years

The Bank of Canada raised its key interest rate by a quarter point to 2.5% on Wednesday, its first increase since July 2023, as it moved to stop surging energy costs from spreading into wider inflation. Governor Tiff Macklem said the outlook for prices had become substantially worse, and warned that further increases might still be needed, though the bank would proceed carefully given the uncertainty ahead.

Annual inflation reached 3.2% in September, above the bank's 1% to 3% target range, driven almost entirely by higher energy and transport costs. The bank now expects inflation to end this year at 3.5% and stay near 3% for most of next year before returning close to the 2% target by mid-2028. It also lifted its 2027 inflation forecast to 3.1%, up from the 2.0% predicted in July, while raising its growth outlook for this year to 1.0%.

The move will likely push up bank lending rates and mortgage costs for Canadian households, and could slow economic growth. Macklem acknowledged that higher rates would not immediately feel helpful, but argued that getting inflation down was the best thing the bank could do for families and businesses. Economists surveyed before the decision had widely expected the hike, with a majority also forecasting one more rise before March. The decision comes in a week when the US Federal Reserve held its own rates steady, underlining how differently central banks are reading the same global energy shock.

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