Bank of Canada raises key rate in first hike since 2023

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Bank of Canada rate hike 2023

Highlights

Bank of Canada raises policy rate for the first time since 2023, citing concerns over energy-driven inflation risks and future hike possibility.
September consumer price index rises 3.1% year-over-year, exceeding the Bank’s inflation-control range as energy prices surge 19.0% and gasoline 27.8%.
Bank forecasts inflation to stay above 3% through most of 2027, easing to 2% by mid-2028, while households face increased borrowing costs and persistent expenses.

Rate decision and inflation outlook

As reported by Moneysense, the Bank of Canada says the rate increase is needed to reduce the risk that elevated energy prices spill over into broader inflation. Governor Tiff Macklem says there could be a need to raise the policy rate further, but the bank will proceed carefully given ongoing uncertainties.

Statistics Canada says the consumer price index rises 3.1% in September from a year earlier, up from 3.0% in August and slightly above the top of the Bank’s 1% to 3% inflation-control range. Energy prices are up 19.0% over the year, while gasoline rises 27.8%; excluding gasoline, inflation is 2.2%.

The Bank of Canada says inflation is projected to remain above 3% through much of 2027, longer than anticipated in its July report. It then gradually declines and settles around the 2% target by the middle of 2028 as cost pressures fade.

Household and market impact in Canada

Economists and consumer finance specialists say the rate move underlines the difficult balance facing policymakers as they respond to price pressures without adding too much strain to households and businesses. Clay Jarvis, mortgage expert at Ratehub.ca, says the increase is a pre-emptive step against inflation but notes that higher borrowing costs arrive when many consumers are already dealing with elevated expenses.

Jarvis says the overnight rate does not affect gasoline prices directly, meaning consumers and businesses now face more expensive credit while other costs remain high. Faye Lucas, head of consumer trust at Koho, says the decision lands on households already stretched by grocery bills, energy costs, credit card balances and mortgage payments.

The next Bank of Canada rate decision is scheduled for Dec. 9 and will not include a new Monetary Policy Report. Further action is likely to depend on whether energy-led price increases spread more broadly across goods and services, while the outlook also remains sensitive to labor market weakness and trade pressures.

Our earlier coverage of UBS Global Wealth Management’s outlook highlighted how persistent inflation is prompting expectations for a longer U.S. Federal Reserve tightening cycle. We noted that UBS projected additional rate hikes into 2027, with market pricing also shifting toward higher-for-longer borrowing costs as inflation pressures broaden across goods and services.

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