Bank of Canada Raises Benchmark Rate to 2.5% in First Hike in Three Years
The Bank of Canada increased its benchmark interest rate from 2.25% to 2.5% on Oct. 29, citing concerns over high oil prices. The move has shifted mortgage preferences and prompted market expectations of further hikes through 2027.
The Bank of Canada raised its benchmark interest rate from 2.25 per cent to 2.5 per cent on Oct. 29, marking the central bank’s first rate increase in three years. The decision was driven by concerns that high oil prices could lead to sustained inflation.
Following the announcement, the Canadian dollar rose against the U.S. dollar as the U.S. Federal Reserve kept its own interest rates on hold. The Bank of Canada considers its neutral range for the policy rate to be between 2.25 per cent and 3.25 per cent.
The rate hike is already influencing mortgage decisions across the country. Nearly half of consumers taking out or renewing a mortgage in 2026 signed up for a variable rate, a sharp increase from less than 10 per cent in 2024. Variable mortgage rates are currently available in the high 3 per cent range, while most fixed rates sit in the high 4 per cent range. Mortgage shoppers are now reconsidering whether variable or fixed rates are more advantageous depending on future rate paths and individual risk tolerance.
Market expectations point toward further tightening. Interest rate swap markets are pricing in three additional quarter-point rate hikes by the end of 2027, which would bring the policy rate to 3.25 per cent. Bond traders are pricing in 54-per-cent odds of another Bank of Canada rate hike this December and are fully pricing in another quarter-point increase by January. Desjardins senior economist Kari Norman expects a second 25-basis-point increase in December followed by a pause.
However, not all analysts agree with the aggressive market pricing. Some Bay Street analysts believe that pricing in three more hikes by 2027 is too aggressive, suggesting only one or two more increases are likely. Economists remain divided on whether the rate hike was necessary given the supply-side nature of the inflation shock versus the fragility of the broader economy.
The higher interest rate environment carries wide-ranging impacts. It is expected to contribute to slowing sales and downward pressure on prices in Canada’s housing sector. High oil prices are also increasing transportation and production costs, which could lead to potential rises in retail and food prices. On the savings side, interest rates on savings accounts may increase, and GIC rates have become attractive again for investors.