Bank of Canada raises rates to 2.5% amid inflation concerns and political backlash

The Bank of Canada increased its benchmark overnight interest rate by 25 basis points to 2.5% on Wednesday, October 28, 2026, marking the first rate hike since July 2023. Governor Tiff Macklem stated that the move aims to reduce inflation risks posed by elevated energy prices, which risk spreading broadly through the economy. The central bank cited rising oil costs—driven partly by Middle East conflict and geopolitical tensions—as the primary driver of inflationary pressure, with Brent crude averaging $124.96 per barrel in October, approximately $35 higher than in July.

The Bank of Canada raised its 2027 inflation forecast to 3.1 percent from 2 percent and warned that further rate hikes may be necessary. Current inflation stands at 3.1 percent. The monetary policy report identified high fuel prices and trade uncertainties with the United States as the two biggest risks to the Canadian cost of living. Survey data showed that 60 percent of consumer-facing businesses expect to pass increased costs to customers within the next 12 months. Despite these concerns, the Canadian economy showed resilience, with growth reaching 3.3 percent in the second quarter, though the bank expects growth to slow to 2 percent in the third quarter and further decelerate in the fourth quarter due to new U.S. tariffs.

Ontario Premier Doug Ford criticized the decision as "a massive mistake," arguing that higher rates would not address the underlying causes of inflation—oil supply disruptions or trade tariffs—and would only increase living costs for Canadian families and workers. Ontario Finance Minister Peter Bethlenfalvy offered a more measured response, acknowledging that the Bank of Canada is independent and that controlling inflation is important, while understanding Ford's advocacy for lower rates.

Economists offered mixed assessments. Some called the decision "tough" and forward-looking, suggesting it reduces the risk of a more aggressive tightening cycle later. CIBC Capital Markets predicted the Bank of Canada would skip a December hike but raise rates again in January to 2.75 percent. Desjardins Group assessed the odds of a December rate increase at 50-50 and also predicted a final hike in January. Capital Economics noted that the central bank appeared to view energy-driven inflation risks as outweighing trade-related downside risks, though disagreed with the growth outlook. Market expectations shifted after the announcement, with probability of a December hike declining from 100 percent to 55 percent.

The Bank of Canada's Monetary Policy Report projected Canadian GDP growth of approximately 2 percent in 2027, supported by business investment, improving exports, and government spending, though concerns about tariff impacts persisted. The unemployment rate has hovered around 6.5 percent, described as making it more difficult than usual for jobless Canadians to find work.