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Bank of Canada Raises Overnight Rate

Canadian Economics

By: Amir Roshani

    

The Bank of Canada raised the overnight rate by 25 basis points to 2.50 per cent, the Bank Rate to 2.75 per cent, and the deposit rate to 2.45 per cent, marking its first increase since July 2023 and ending a pause that began in October 2025.

  • The conflict in the Middle East is now in its eighth month with no clear resolution in sight. The Bank’s projection assumes Brent crude averages about US$100 per barrel in the fourth quarter before easing gradually to around US$75 by the end of 2028. This is roughly $5 per barrel above the July assumption.  
  • Higher energy prices have done little so far to slow the global economy. Consumer spending and AI investment continue to support the U.S. economy, while the euro area continues to post broad-based gains. China’s growth recovered in the third quarter on strong exports and fiscal support, although consumer demand remains subdued.
  • The Bank raised its global growth projection for 2026 slightly to 3.1 per cent and kept 2027 and 2028 broadly unchanged at about 3.2 per cent. 
  • The Bank expects the Canadian economy to grow by 1.0 per cent in 2026 and 2.0 per cent in both 2027 and 2028, slightly higher than projected in July. 
  • Elevated oil prices have pushed inflation higher in most countries.  CPI inflation in Canada has been around 3 per cent since April and is expected to reach about 3.5 per cent by the end of the year. Excluding gasoline, inflation was 2.2 per cent in September, and core measures remain near 2 per cent. However, high fuel prices and more expensive imported inputs are raising costs for businesses. So far, businesses have absorbed the majority of these costs, although Bank surveys suggest they are more likely to pass them on to consumers over the next year.
  • Near-term inflation expectations among households and businesses have increased, while longer term expectations have remained relatively unchanged. The Bank now expects inflation to average about 3 per cent in 2027, before returning to 2 per cent in 2028.
  • The unemployment rate has remained close to 6.5 per cent for several months, but the Bank continues to see some excess supply in the economy.
  • The Bank’s Governing Council mentioned that the rate increase is aimed at keeping high energy costs from feeding into a broad range of prices. It left the door open for further increases while using a cautious approach given the uncertainties ahead.

Key Insights

This rate increase targets where inflation is heading, not where core inflation sits today. Inflation excluding gasoline was 2.2 per cent in September, while core measures remain close to 2 per cent. The rise in inflation over the last several months has been concentrated mainly in a few energy-related components. Businesses have so far absorbed most of their import and fuel costs. However, they  expect to pass more of those costs on over the next year. The Bank now expects inflation to remain above 3 per cent through the third quarter of 2027 and to average 3 per cent that year, 1 percentage point higher than projected in the previous Monetary Policy Report. In July, we noted that relatively weak demand helped to keep energy costs from spreading to other prices. Now that the Bank expects economic slack to be absorbed while oil prices remain high, its restraint has faded. 

Most of the upward revision to 2026 growth reflects economic activity that has already occurred. The Bank raised its 2026 growth forecast by 0.3 percentage points, mainly because growth in the middle of the year was stronger than estimated. The economy grew by 3.3 per cent in the second quarter and an estimated 2 per cent in the third, compared with 2.5 per cent and 1.5 per cent, respectively, in the July report. Growth is expected to slow to less than 1 per cent in the fourth quarter, mainly because of new U.S. tariffs and trade uncertainty. The Bank also raised its growth forecasts for 2027 and 2028 by about 0.2 percentage points each. Most of these gains are linked to stronger consumption, with business investment also higher, partly because of new federal tax incentives. However, it remains unclear how strongly or quickly businesses will respond to these incentives, while further U.S. trade restrictions or continued uncertainty could weaken business investment and household spending.

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