Taking a hike

Key points

• The Bank of Canada's first hike in over three years takes its trendsetting policy interest rate from 2.25% to 2.5%.
• Governor Macklem indicated that elevated inflation was the main concern and that the Bank needed to act now rather than wait to see if energy costs remain high and spill over to consumer prices more broadly.
• The Bank’s next decision in December will depend on how economic conditions evolve.

“With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation.”

—Bank of Canada Governor Macklem, Monetary Policy Report Press Conference Opening Statement, October 28, 2026

Tiff Macklem hinted at it earlier this month, and now it's happened: the Bank of Canada has taken its finger off the pause button and raised its trendsetting policy rate from 2.25% to 2.5%.

This is the first interest rate hike in over three years and, as we discussed yesterday, will increase the cost of borrowing for anyone with a variable-rate mortgage, line of credit, or car loan.

Walking a tightrope between above-target inflation and weak economic growth, the Bank has headed toward dealing with the inflation situation.

Getting ahead of inflation

According to the press release, getting ahead of inflation was the reason for the change in policy. The “persistence of inflation” in the Bank’s outlook is linked to the “combination of higher-for-longer energy prices and increased pass-through.” As a result, “Governing Council decided to increase the policy rate to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services.” This marks a shift away from focusing on current indicators to trying to get in front of potential inflation.

The Bank expects the Consumer Price Index to average 3% in 2027. This is a percentage point above the Bank’s July projection and the 2% target. The inflation rate is then expected to come down to 2% in the middle of 2028.

Strong enough - The Canadian economy

We were concerned that a hike would be ill-timed with regard to the wobbly nature of Canada’s current economic growth, but the Bank argues that “growth has picked up this year and is expected to recover further.”

The Bank is forecasting economic growth of 1% in 2026 and 2% in 2027 and 2028. These are not strong numbers, but they are apparently strong enough for the Bank to raise the cost of borrowing.

What’s next?

The Bank has not provided much in the way of forward guidance, but has indicated that additional hikes may be necessary to tame inflation. At the same time, it says that it will “proceed carefully” and “take future decisions one meeting at a time.”

We take this to mean that it will be carefully watching the data on inflation and economic growth before making its next decision (which comes on December 9). There is, however, only one more inflation report (November 16) before the next rate announcement, so it’s unclear how much new information the Bank will have on hand between now and its December decision.

Arguably, if the concern is getting ahead of future inflation, an increase in the policy rate of another 25 basis points in December or early 2027 (announcements are scheduled for January 27 and March 3) seems likely unless the direction of energy prices changes meaningfully before then.

In tomorrow's Twenty-Four, we dig into the Bank’s new forecast for the Canadian economy and the market’s reaction to the rate increase.

Answer to the previous trivia question: The Royal Commission on the Status of Women was established in 1967.

Today’s trivia question: Tabled in Parliament on December 7, 1970, how many recommendations on updating the legislative system and addressing critical issues for women did the Report of the Royal Commission on the Status of Women in Canada include?