Bank of Canada Raises Interest Rates to 2.5%

The Bank of Canada raised its key policy interest rate by 25 basis points to 2.5% on October 28, 2026, marking the first increase since July 2023. Governor Tiff Macklem stated the hike was necessary to prevent elevated energy costs, driven by conflict in the Middle East and disruptions in the Strait of Hormuz, from spilling over into generalized inflation. September's annual inflation rate reached 3.1%, exceeding the bank's target range.

The central bank revised its inflation outlook, projecting that annual inflation will reach 3.5% by the end of 2026 and raising its 2027 forecast to 3.1%. While the bank upgraded GDP forecasts for 2027 and 2028 to 2%, Macklem warned that new U.S. trade tariffs could slow fourth-quarter growth to 0.8%. He indicated that further rate hikes may be required, though the Governing Council intends to proceed carefully.

The decision has sparked concerns across the housing and construction sectors. The Canadian Construction Association warned that higher borrowing costs squeeze contractor margins, while reports indicate rising mortgage delinquencies in Ontario and British Columbia. In contrast, the Canadian energy sector is seeing increased investment and production growth. The next interest rate decision is scheduled for December 9, with some analysts predicting another quarter-point increase.