Bank of Canada raises interest rate to 2.5% in first hike since 2023
The Bank of Canada increased its benchmark overnight rate by 25 basis points to 2.5 per cent on October 28, 2026, citing elevated energy prices driven by the ongoing Middle East conflict. Economists are divided on whether the move signals a broader tightening cycle or an isolated adjustment.
On Wednesday, October 28, 2026, the Bank of Canada raised its target for the overnight rate by 25 basis points to 2.5 per cent. The decision marks the central bank's first rate increase in three years and its first change to the benchmark in a year.
Governor Tiff Macklem acknowledged that raising rates will not feel good for Canadians but stated the move is necessary to get inflation back down. Consumer inflation was measured at 3.1 per cent in September 2026. The Bank expects headline inflation to rise to about 3.5 per cent by the end of 2026 due to oil and gas prices. Core measures of inflation, excluding gasoline, have remained closer to two per cent, which is the Bank's target.
Energy costs have surged amid geopolitical tensions. The conflict in the Middle East is cited as being in its eighth month with no clear path to resolution, contributing to higher-for-longer energy prices. Benchmark oil prices are reported to be back above US$100. According to The Globe and Mail, gasoline prices have risen more than 30 per cent over the past year, while the Financial Post reports that energy prices rose by around 19 per cent year over year in September.
Alongside the rate decision, the Bank of Canada revised its economic growth forecasts upward. GDP growth was 3.3 per cent in the second quarter of 2026, revised up from a previous estimate of 2.5 per cent. The central bank now projects Canadian economy growth of one per cent in 2026 and two per cent in both 2027 and 2028. The unemployment rate has been around 6.5 per cent for several months.
Economists are divided on what the rate hike signals for future monetary policy. Andrew Grantham, a senior economist at CIBC, predicts the Bank of Canada will hold rates at 2.5 per cent in December and hike again by 0.25 per cent in January. In contrast, Andrew DiCapua, a principal economist at the Business Data Lab, views the hike as an "insurance policy" and does not expect it to be part of a series of hikes.