Canada rate hike to 2.5% is the first since 2023 as oil bites
The Bank of Canada raised its policy rate to 2.5%, lifted its 2027 inflation forecast to about 3% and warned that more tightening may be needed, while promising to move carefully.
Canada has joined the tightening camp. The Canada rate hike announced by the central bank on Wednesday lifted the overnight target by a quarter point to 2.5%. The Bank Rate now stands at 2.75% and the deposit rate at 2.45%. It is the first hike since July 2023.
What happened
Governor Tiff Macklem said the Governing Council weighed two options, hold or hike. The case for holding was that price pressure has been concentrated in energy and energy-heavy services such as airfares: CPI excluding gasoline was 2.2% in September and core measures are near 2%. The case for hiking won because fuel prices are expected to stay high and businesses plan to pass on more costs over the next year.
The new Monetary Policy Report is gloomier on prices and a little brighter on growth. Headline inflation, 3.2% in September according to Reuters, is expected to reach about 3.5% by year-end and to average 3% in 2027, a full point above the July projection, before returning to target around mid-2028. GDP is now seen growing 1% this year, up from 0.7%, and about 2% in both 2027 and 2028. The bank expects new US tariffs to slow activity in the fourth quarter.
"There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully," Macklem told reporters. Even after the move, the rate sits below the 2.75% midpoint of the bank's neutral range, Reuters noted.
Why it matters
The Canada rate hike was widely expected and matched our Oct. 26 Record call, which we built on the Bank of Canada hike odds at the time. It contrasts with New Zealand, where the RBNZ surprise hold went the other way. The Canadian dollar firmed slightly to about C$1.4050 per US dollar.
Not everyone thinks the bank needs to go far. CIBC's Andrew Grantham told Reuters he does not expect the policy rate to rise above 2.75%, because core inflation should not accelerate as much as the bank fears if energy prices ease.
What's next
The next decision is due on Dec. 9. Macklem said the council will decide one meeting at a time, with the Middle East war and Canada-US trade as the main swing factors. The decision and the report are on the Bank of Canada's website.
The call
We say the Bank of Canada will leave its rate unchanged on Dec. 9. Polymarket's "Will the Bank of Canada make no change to the target for the overnight rate at the December interest rate announcement?" market priced Yes at 73% at 08:19 MSK on Oct. 29. After this Canada rate hike, Macklem's promise to proceed carefully and a projected fourth-quarter slowdown argue for a pause, unless core inflation jumps.
This article is for information only and is not investment advice. Calls are editorial forecasts, logged with market odds at the time of publication and kept on the record.