Bank of Canada Raises Policy Rate to 2.50% on Higher Inflation Outlook — Update

By Paul Vieira

OTTAWA--The Bank of Canada on Wednesday raised its main interest rate by a quarter point to 2.50% on the expectation that inflation will remain significantly above its 2% target until 2028.

Gov. Tiff Macklem said, "there could be a need to raise the policy rate further" to contain inflation, although officials vowed to proceed carefully.

"An increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation," said Macklem, according to prepared remarks set for delivery at a press conference. "We are mindful that uncertainty is still elevated" due to the U.S.-Canada trade row and the conflict in the Middle East.

The Bank of Canada sets rate policy to achieve and maintain 2% inflation.

The central bank also upgraded its growth forecast on the strength of consumer spending and exports, and an anticipated pickup in business investment as companies increasingly adopt artificial intelligence and take advantage of new tax-writeoff rules introduced by Prime Minister Mark Carney.

This marked the first Bank of Canada rate increase since July 2023, and comes amid a period of uncertainty with the escalation of trade tensions with the U.S. and softness in the labor market. The Federal Reserve and the European Central Bank have raised its benchmark rates this year on inflation concerns.

In its decision, Canada's central bank pointed to surprising economic resilience, citing broadening export growth despite the presence of hefty U.S. tariffs on key sectors such as steel, aluminum, automobiles and forest products. The export gains were supported by solid foreign demand and businesses shifting gears amid a changing global trade environment, the central bank said.

The majority of economists surveyed last week by The Wall Street Journal predicted a rate increase, and indicated at least one more rate hike in the coming months.

The energy shock has proved to be more persistent than the central bank expected, and as a result it sharply revised upward its outlook for inflation by roughly a full percentage point. The Bank of Canada said in a quarterly forecast that it expects headline inflation to remain above 3% through the third quarter of next year, before easing gradually toward its 2% target by the middle of 2028. Inflation is projected to reach 3.5% by the end of this year.

The central bank attributed the revision to a combination of higher energy prices on the futures market, and responses from its business survey suggesting a larger share of firms are ready to pass on higher input costs to their clients over the next 12 months. The Bank of Canada's surveys also indicated that inflation expectations among firms and households moved higher.

Macklem said senior officials discussed leaving the policy rate unchanged at 2.25%, as they noted inflation excluding gasoline was close to 2%, and spare capacity remained in place. Prior to Wednesday's decision, some economists argued this could provide leeway for senior policymakers to keep the policy rate unchanged.

In the end, Macklem said fuel costs are expected to remain higher for an extended period, and businesses were reluctant to continue absorbing increased input costs. The improving domestic economic backdrop was also incorporated, Macklem said. Canada is a net exporter of crude oil, and that stands to lift government tax revenue, and the aggregate value of Canadian sales abroad.

The central bank expects annualized growth of 2% in third quarter but activity to soften in the final three months. For 2026, the central bank upgraded its growth projection to 1% from its previous call for a 0.7% increase, and anticipates 2% growth in 2027 and 2028.

Write to Paul Vieira at paul.vieira@wsj.com

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October 28, 2026 10:09 ET (14:09 GMT)