Bank of Canada Raises Benchmark Interest Rate to 2.5% in First Hike in a Year
The Bank of Canada increased its benchmark interest rate by a quarter-point to 2.5% on October 28, its first rate change in a year, citing risks that surging energy prices could drive broader inflation.
The Bank of Canada raised its benchmark interest rate by a quarter-point to 2.5 per cent on October 28, marking the central bank's first rate change in a year after holding the rate at 2.25 per cent for seven consecutive meetings.
Governor Tiff Macklem stated the rate hike was needed to reduce the risk of higher energy prices spilling over into generalized inflation. Canada's annual inflation rate rose to 3.1 per cent in September, largely driven by surging energy prices due to the war in the Middle East. The Bank of Canada expects inflation to reach roughly 3.5 per cent by the end of this year and remain at or above three per cent for much of 2027.
Despite the inflationary pressures, the Canadian economy has shown resilience. Canada's GDP grew by 3.3 per cent in the second quarter, the fastest quarterly growth since 2023, driven by rebounding exports and domestic investment. Macklem noted that federal policies like Carney's productivity mega deduction and major project accelerations are predicted to strengthen business investment in 2027.
Deputy Governor Carolyn Rogers acknowledged that the rate hike will add pressure on homebuyers. She expects the housing market to remain sluggish, with growth forecast at about one per cent over the next two years.
The decision drew criticism from business groups concerned about rising costs. Simon Gaudreault, chief economist for the Canadian Federation of Independent Business (CFIB), stated that the rate hike adds pain for businesses already struggling with trade war costs and variable debt rates.
Following the announcement, the loonie traded at $0.7124 US, with experts predicting potential weakness before the end of the year.