OTTAWA — The Bank of Canada raised its benchmark interest rate for the first time in more than three years on Wednesday as it tries to get ahead of looming price hikes.
The central bank’s policy rate now stands at 2.5 per cent following a quarter-point hike.
That key rate, which influences the cost of borrowing for banks, businesses and consumers alike, had held steady for nearly a year following a series of cuts.
The Bank of Canada operates independently of government and raises its policy rate when it’s worried inflation will stray too far from its mandated two per cent target.
The bank spent much of 2026 watching to see if higher global energy prices from war in the Middle East would spread to other parts of the consumer basket.
Inflation ticked up to 3.1 per cent in September, thanks again to high gas prices.
Bank of Canada governor Tiff Macklem said Wednesday that global oil prices are staying higher for longer and cost pressures are building. Businesses that have been absorbing costs from the global energy shock are increasingly likely to pass more of those costs on to their customers.
Macklem said the central bank’s governing council is increasingly convinced that consumers could soon feel the pinch beyond the gas pumps.
The Bank of Canada substantially revised up its path for inflation in a new outlook on Wednesday. The central bank now expects annual inflation will hit 3.5 per cent at the end of this year and gradually ease back to around two per cent by mid-2028.
The grocery store is particularly vulnerable to rising costs as higher energy prices move through the supply chain. The Bank of Canada sees food inflation averaging around four per cent in 2027, up about half a percentage point from this year.
“With 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,” Macklem said.
An increase to the policy rate makes borrowing more expensive and offers better returns for savers — discouraging spending to take the steam out of inflation. By extension, rate hikes also typically hamper economic growth.
Macklem argued during a press conference Wednesday that the policy rate is still not in restrictive territory.
“Even with this increase, it’s still low enough that it’s not restraining growth,” he said.
“But by increasing it, we’re going to help lean against or mitigate the pass-through of higher energy prices into other goods and services.”
The head of the Bank of Canada acknowledged that raising the benchmark interest rate might frustrate businesses and Canadians, who will face higher rates on key loans like mortgages.
But Macklem stressed that raising the policy rate now to get ahead of a possible rise in inflation is in the country’s best interest.
“Yes, it’s not going to feel good immediately, but that’s how you get inflation back down and that will feel good for Canadians and Canadian businesses,” he said.
Early in the month, financial markets put narrow odds of a rate hike at the October meeting. But in recent weeks, markets and many economists started to pencil Wednesday’s rate hike into their forecasts.
That came despite economic data showing a back-to-back months of job losses and relatively tame core inflation metrics in September.
The bank’s governing council did consider holding its policy rate steady at this meeting, Macklem said, because the rise in inflation has been narrowly concentrated around the energy price shock.
But Frances Donald, chief economist at RBC, said the Bank of Canada has been telegraphing its intent to hike since it last held the policy rate steady in early September.
Even though RBC’s official call was for a rate increase on Wednesday, Donald said she did not, and still doesn’t, see the urgency for hikes.
“To be clear, there’s nothing in the current revealed data that tells us inflation is rising right now,” she said.
Rather than looking for signals of rising price pressures in backward-looking Statistics Canada data, Donald explained that the Bank of Canada is scouring producer-level metrics and business surveys to try to track where inflation might be headed.
Canadians are still, in many cases, catching up to the post-pandemic bout of inflation and are more sensitive to rising prices, she said. That could be one reason the Bank of Canada is tightening proactively.
“It’s clear that the Bank Of Canada has revealed a bias and preference towards getting ahead of inflation, even if it risks slowing growth,” Donald said.
Macklem said the central bank will take its upcoming decisions “one meeting at a time” but also suggested future rate hikes are still in the cards.
“There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully,” he said.
Financial market odds for another quarter-point hike at the Bank of Canada’s final decision of the year on Dec. 9 stood at 43 per cent as of Wednesday afternoon, according to LSEG Data & Analytics.
Charles St-Arnaud, chief economist at Servus Credit Union, said in a note to clients that he expects the central bank will deliver back-to-back hikes to end the year with a policy rate of 2.75 per cent. Only a weakening economy or softer than expected inflation readings would prevent the second hike, he argued.
Donald said letting the policy rate stand after a single rate hike would be “atypical,” and new forecasts for stronger economic growth in the years ahead suggest the Bank of Canada believes it has the bandwidth for additional hikes.
The Bank of Canada is likely set to raise its key rate again in December or January, Donald said. RBC sees this tightening cycle continuing with three more hikes in total, assuming the economy continues to show resilience in the face of sharp headwinds.
The Bank of Canada presented a somewhat rosier economic outlook on Wednesday that now calls for real GDP growth of two per cent in 2027 and 2028, compared with one per cent in 2026.
The central bank expects growth will take a hit in the fourth quarter from a re-escalating tariff dispute with the United States, but officials signalled that businesses are broadly adapting to the trade disruption.
The U.S. Federal Reserve, which raised interest rates in September, opted to hold steady on Wednesday as it waits for more clarity on the path for inflation.
This report by The Canadian Press was first published Oct. 28, 2026.
Craig Lord, The Canadian Press