Bank of Canada Hikes Rate to 2.5%, Its First Increase Since 2023

OTTAWA — Canada’s central bank lifted its overnight rate target on Wednesday by a quarter point, to 2.5%. It was the bank’s first increase since July 2023.

Governor Tiff Macklem said the outlook had changed since the bank’s July report. Inflation looked worse, and growth had held up better than expected.

The Bank of Canada set the Bank Rate at 2.75% and the deposit rate at 2.45%. In its statement, it said Governing Council might need to raise the policy rate again, but would proceed carefully given the uncertainties.

Consumer price inflation has run around 3% since April. The bank expects it to reach about 3.5% by the end of the year, then average 3% in 2027 — a full point above its July projection — before returning to 2% in the middle of 2028.

Take gasoline out of the numbers and inflation looks tamer. Without it, the September figure was 2.2%, and the core measures were still near 2%. But fuel is pushing up production and transport costs, and the bank’s surveys suggest businesses will pass more of those costs on over the next year.

The economy did better than the bank had pencilled in. Output grew 3.3% in the second quarter, and the signs since point to roughly 2% growth in the third. Shoppers kept spending. Business investment bounced back too, helped by oil and gas activity and spending on machinery and equipment.

The bank still expects growth to slow in the fourth quarter as new U.S. tariffs bite, then pick up again in 2027. It forecasts growth of 1% this year and 2% in both 2027 and 2028. Unemployment has sat around 6.5% for several months.

Macklem said council weighed holding against hiking. Holding had a case: the inflation rise so far sits mostly in energy. The case for hiking won, he said, because energy prices are higher, look set to stay higher, and cost pressures are building.

The bank’s next scheduled rate announcement is Dec. 9.