Bank of Canada hikes for the first time since 2023 — and warns more could follow.

The decision

The Bank of Canada raised its target for the overnight rate by 25 basis points to 2.50% on Wednesday, Oct. 28, with the Bank Rate at 2.75% and the deposit rate at 2.45%, the Bank said in its statement. It is the central bank's first rate increase since July 2023 and its first policy move in almost a year — the rate had stood at 2.25% since a cut in October 2025.

The hike matched market expectations: in a Reuters poll conducted Oct. 21–23, 19 of 34 economists expected a move to 2.50%, and market pricing had put the odds near three in four. The decision settles the two-sided debate that dominated the run-up — including a hold call from Rabobank strategists, reported by FXStreet on Oct. 26 — in favour of the hike camp.

Why the Bank moved

"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," the Bank said. CPI inflation has been around 3% since April and is expected to rise to about 3.5% by the end of the year, the Bank said, with inflation averaging 3% in 2027 — a full percentage point above its July projection — before returning close to the 2% target by the middle of 2028.

Governor Tiff Macklem, in his opening statement, said the inflation outlook had deteriorated since July: with the Middle East conflict now in its eighth month and no clear path to resolution, oil prices are expected to stay higher for longer, hitting Canadians at the pump and raising costs for businesses. Bank surveys suggest businesses, which have mostly absorbed higher input costs so far, will pass more of them through over the next year.

The Bank said it considered holding: inflation so far is concentrated in energy and energy-heavy services such as airfares, core measures remain close to 2%, and there is still slack in the economy. But with the economy showing resilience, the Bank concluded risks to inflation had increased and there was less scope for monetary accommodation.

A stronger growth forecast — with a fourth-quarter dip

The Bank raised its growth outlook: the economy is expected to grow 1% in 2026, up from 0.7% in the July forecast, and 2% in both 2027 and 2028. Growth was 3.3% in the second quarter, with recent indicators pointing to about 2% in the third, the Bank said, but growth is expected to slow in the fourth quarter as new U.S. tariffs weigh on activity before picking up again in 2027 on business investment, exports and fiscal measures. Unemployment has held around 6.5% for several months, according to the Bank.

What it means for borrowers

If the big banks move prime in step, as they usually do, prime rises from 4.45% to 4.70% — prime sits 2.20 percentage points above the policy rate. As an illustration only, not financial advice: a 25-basis-point rise adds roughly $41 a month on a $300,000 mortgage, $68 on $500,000 and $103 on $750,000, on a prime-minus-0.40% variable rate over 25 years. Fixed rates have already priced in much of the expected tightening path, so the bigger swing for fixed borrowers comes from how the statement and forecasts shift December expectations.

The market reaction to the headline was muted, because the hike was largely priced in: the loonie traded around 1.4040 per U.S. dollar shortly after the announcement, according to Kitco, and the Bank noted the Canadian dollar has recovered to around 71 cents U.S., the same as assumed in July.

What happens next

"There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully," the Bank said, adding it will take future decisions one meeting at a time. Later the same day the U.S. Federal Reserve held its own rate steady at 3.75–4%, August GDP lands Friday, Oct. 30, and the Bank's final decision of 2026 comes Dec. 9.