Key takeaways: The Bank of Canada raised its key interest rate by a quarter point to 2.5% on Wednesday — its first increase since July 2023. The reason is energy: petrol and diesel prices have pushed headline inflation above the bank’s target range, and Governor Tiff Macklem says the bank is acting now so that an energy shock does not become general inflation. Markets now price a decent chance of another hike in December.
For more than three years, Canada’s central bank had only cut rates or stood still. On Wednesday it moved the other way, lifting its target for the overnight rate from 2.25% to 2.5% after seven consecutive holds at the lower level. It was the bank’s first policy change of any kind in about a year, and its first hike since July 2023.
The trigger is visible at every petrol station in the country. Headline inflation ran at around 3% in September, above the bank’s 1% to 3% target range, driven almost entirely by energy and energy-related transport costs. The bank’s October Monetary Policy Report now expects inflation to end the year at about 3.5% and average around 3% through most of 2027 — a full percentage point above its July forecast — before returning close to the 2% target around the middle of 2028. Growth this year is projected at 1.0%, up from 0.7% expected in July. The move comes as the IMF raised its global growth forecast while warning the cushion is thinning.
“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,” Macklem said in his opening statement to reporters. “There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully.”
Markets heard the warning. The Canadian two-year bond yield touched 3.441%, its highest since August 2024, and the Canadian dollar edged higher to about 1.4035 per US dollar. Swap markets put roughly a 45% chance on another hike in December and have fully priced a second increase by January.
The contrast with the United States is striking: the US Federal Reserve held its own rate the same day. Canada is hiking into a weakening jobs market, and higher borrowing costs will feed through to variable-rate mortgages, lines of credit and car loans. Macklem did not pretend otherwise. “Higher interest rates aren’t going to immediately feel like they are helping,” he said. “What is the best thing we can do for Canadian households and Canadian businesses… is that we can get inflation down.”
What happens next: the bank’s December decision is now the one to watch. If energy prices stay high and start showing up in the prices of goods and services beyond fuel, Macklem has left the door open to move again. If they fade, this hike may stand alone — an insurance premium paid early, rather than the start of a long climb.
