Bank of Canada Raises Benchmark Rate to 2.5% in First Hike Since July 2023
The Bank of Canada increased its policy rate by 25 basis points to 2.5 per cent on Wednesday, prompting major banks to raise prime rates to 4.70 per cent. Governor Tiff Macklem cited persistent inflation driven largely by fuel costs and warned further hikes could follow.
The Bank of Canada raised its benchmark policy rate by 25 basis points to 2.5 per cent on Wednesday, marking the central bank’s first rate hike in more than three years, since July 2023.
Following the announcement, all five major Canadian banks immediately increased their prime interest rates by a quarter point to 4.70 per cent. Because variable-rate mortgages are directly linked to the issuing bank's prime rate, those payments will increase immediately. The higher prime rate also affects consumers with home equity lines of credit (HELOCs).
For borrowers, the financial impact is direct. On a $500,000 mortgage, a 25 basis point hike adds approximately $70 per month to payments. A consumer carrying $200,000 in a variable-rate mortgage or HELOC will face about $500 worth of additional interest cost annually. These rising monthly costs add financial strain to households already contending with elevated fuel and grocery prices, potentially forcing some consumers to prioritize bills as disposable income shrinks.
Bank of Canada Governor Tiff Macklem stated that more rate hikes could occur if inflation persists, noting it is likely to be "more persistent." Inflation ticked up to 3.1 per cent in September, which the central bank attributes largely to high gas prices. The Bank of Canada expects annual inflation to hit 3.5 per cent at the end of this year before easing to around two per cent by mid-2028. Food inflation is expected to average around four per cent in 2027.
Charles St-Arnaud, chief economist at Servus Credit Union, expects back-to-back hikes to end the year with a policy rate of 2.75 per cent.
The rate increase arrives as Canada's housing market faces headwinds. Deputy governor Carolyn Rogers noted that the housing market is already struggling, particularly in Ontario and British Columbia. Experts predict the latest move will further depress the soft market, shrinking the pool of eligible buyers and shifting power from sellers to qualified buyers, which could cause home prices to dip. Earlier in the month, the Canadian Real Estate Association (CREA) cut its forecast for 2026 home sales for the third time this year.