Bank of Canada raises policy rate by 25 basis points to 2.5%

The Bank of Canada lifted its key policy rate by 25 basis points to 2.5% on Wednesday, marking the first increase in more than three years. Governor Tiff Macklem said the move was needed because “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.” He added that additional hikes might be required, but the bank would proceed cautiously given prevailing uncertainties.

The central bank also raised its 2027 inflation forecast to 3.1% from 2.0% and expects annual inflation to end the year at 3.5%, staying near 3% through next year before moving back toward the 2% target by mid-2028. Growth for the current year is projected at 1.0%, up from the 0.7% estimate in July.

While the rate remains below the neutral level, the bank warned that higher energy prices and cost pass-through could sustain inflationary pressures. Macklem noted lingering uncertainties, including the trade dispute with the United States and developments in the Middle East, could affect the outlook.

Some economists argued that core inflation is near 2% and that further tightening might hinder a modest economic recovery, especially amid U.S. trade tensions and a weak labour market. The bank, however, expects growth to pick up again in 2027 as consumer spending, exports, and business investment improve, despite a projected slowdown to 0.8% in the fourth quarter.