BoC Raises Rate to 2.50% as Inflation Outlook Worsens, Further Hikes Possible

The Bank of Canada raised its overnight policy rate by 25bps from 2.25% to 2.50%, broadly in line with market expectations, as stronger-than-anticipated economic growth and a more persistent inflation outlook warranted further monetary restraint. The BoC noted that growth has picked up since the July Monetary Policy Report, while elevated energy prices are increasingly threatening to spread into broader consumer prices. Governing Council left the door open to additional tightening, stating that “There could be a need to increase the policy rate further,” but emphasized that heightened uncertainty required a careful approach to subsequent decisions.

The most significant change came in the inflation projections. CPI inflation has remained around 3% since April and is now expected to rise to approximately 3.5% by the end of 2026, before averaging 3% in 2027, around one percentage point above the July forecast. Inflation is projected to remain above 3% through much of next year, with a return toward the 2% target delayed until mid-2028. The upward revision reflects persistently high oil prices, elevated refinery margins and higher imported input costs. The BoC also expects inflationary pressures to become more persistent as the effects of these increases spread gradually through production and supply chains.

Importantly, underlying inflation has not yet shown the same degree of deterioration as the headline outlook. CPI excluding gasoline stood at 2.2% in September, while core inflation measures remained close to 2%. Businesses have largely absorbed higher fuel, transportation and imported input costs so far, but Bank surveys indicate that firms expect to pass on a greater share over the next year. This anticipated increase in cost pass-through is central to the BoC’s concern that prolonged energy pressures could become embedded in a broader range of goods and services prices. The Bank nevertheless expects labour costs adjusted for productivity to remain contained, suggesting that the projected inflation persistence is driven primarily by energy and imported costs rather than an emerging wage-price spiral.

Meanwhile, Canada’s growth outlook has strengthened, with GDP expanding 3.3% in Q2 and estimated to grow around 2% in Q3, both stronger than previously anticipated. The BoC revised its 2026 growth forecast upward to 1.0% and expects expansion of 2.0% in both 2027 and 2028, supported by business investment, exports and government spending. However, new US tariffs are expected to slow activity in Q4, while unemployment near 6.5% and remaining excess supply indicate that the economy is not broadly overheating. The combination of stronger growth and more persistent cost-driven inflation supports the possibility of further tightening, but does not guarantee another hike at the December 9 meeting. The BoC’s next move will depend on whether higher costs continue spreading into consumer prices and how the economy responds to trade uncertainty and previous rate increases.

Data Summary

Bank of Canada Monetary Policy Decision — October 28, 2026

Inflation Outlook

Growth Outlook

Source: Bank of Canada, October 28, 2026 policy announcement and October Monetary Policy Report, Overview and Outlook. Growth forecasts were revised upward relative to July. Annual CPI inflation is projected to remain above 3% through much of 2027.

Key Takeaways

• BoC delivers expected 25bp hike: The Bank of Canada raised its overnight policy rate from 2.25% to 2.50%, citing stronger economic activity and a more persistent inflation outlook.
• Further tightening remains possible: Governing Council acknowledged that additional rate increases could be necessary but emphasized that it would proceed carefully amid uncertainty over inflation, growth and trade developments.
• Inflation forecasts deteriorate substantially: CPI inflation is projected to reach approximately 3.5% by the end of 2026 and average 3.0% in 2027, around one percentage point above the July forecast. Inflation is expected to return close to 2% by mid-2028.
• Energy costs are the primary inflation concern: Persistently elevated oil prices, refinery margins and imported input costs are raising production and transportation expenses, with businesses expected to pass on more of these costs over the coming year.
• Current underlying inflation remains relatively contained: CPI excluding gasoline stood at 2.2% in September, while core inflation measures remained close to 2%. The BoC’s concern centres on future cost pass-through rather than an existing broad-based acceleration in underlying inflation.
• Canadian economic growth exceeds expectations: GDP expanded 3.3% in Q2, with growth estimated around 2% in Q3. The BoC upgraded its 2026 GDP forecast to 1.0% and expects growth of 2.0% in both 2027 and 2028.
• US tariffs remain an important downside risk: New US trade restrictions are expected to weaken Q4 activity, while uncertainty surrounding Canada–US trade relations could discourage investment and hiring.
• December decision remains conditional: Stronger growth and persistent cost-driven inflation support continued monetary restraint, but remaining excess supply, contained core inflation and trade uncertainty argue against assuming another hike is inevitable.

Full BoC statement here.