Bank of Canada Raises Policy Rate to 2.50% on Higher Inflation Outlook — 2nd 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" more rate increases, although cautioned that officials must proceed cautiously due to heightened uncertainty. Economists diverged on what this entailed, with some arguing this marked the start of a rate-increasing cycle, while others reckon the Bank of Canada might have only one or two more increases left given some underlying economic softness.

"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 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. Macklem said there is no predetermined path for rates, and Wednesday's decision was an attempt "to help lean against or mitigate the pass-through of higher energy prices into other goods and services."

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 their 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 increase in the coming months.

"The tone in the bank's announcement is decidedly hawkish and the message is clear: this is the first hike in a hiking cycle," said Tu Nguyen, economist at RSM Canada, which provides accounting and consulting services to mid-sized firms. She said she expects another increase in December, "with more to follow" next year.

Etienne Bordeleau-Labrecque, vice president and portfolio manager at Ninepoint Partners, described the Bank of Canada decision as a "dovish hike" because Macklem was noncommittal on more rate increases. "They have set a relatively high bar" for higher rates, he said. "If we fail to see the economic growth they call for, and/or inflation breadth fails to broaden as they expect, we expect the path of further increase to be fairly shallow."

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.

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 also was 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.

"Inflation is looking less likely to be well contained, and is looking more likely to be more persistent. And I think when you look at it through that risk lens, that also tilted in favor of raising the policy rate now," Macklem said.

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 12:21 ET (16:21 GMT)