Bank of Canada raises policy rate as inflation outlook worsens

Traders Union
All News
Economic Data
Bank of Canada raises rate

Highlights

Bank of Canada raised its policy rate by 25 basis points to 2.5% as inflation outlook worsened and growth prospects improved modestly.
Central bank projects CPI inflation to rise to about 3.5% by year-end, staying at or above 3% through much of 2027 before returning near 2% by mid-2028.
Bank signals possibility of further rate hikes, citing risks from high energy prices, Middle East uncertainty, U.S. tariffs, and broadening inflation pressures.

Rate decision and updated economic outlook

As reported by the Bank of Canada, policymakers raised the policy interest rate by 25 basis points to 2.5% and said the move reflects a weaker inflation outlook and modestly stronger growth prospects for Canada.

The central bank says the outlook for inflation has deteriorated as the war in the Middle East keeps global oil prices higher for longer, lifting costs for consumers and businesses. At the same time, it says Canada’s growth outlook has improved modestly despite continued trade actions by the U.S., with exports, business investment and government investment expected to support recovery.

GDP growth reaches 3.3% in the second quarter, and recent indicators point to growth of about 2% in the third quarter. The unemployment rate remains around 6.5% for several months, while a broad set of indicators still points to some excess supply in the economy.

Inflation risks and implications for Canada

The Bank says growth likely slows in the fourth quarter as new U.S. tariffs weigh on activity, but it expects momentum to pick up again in 2027 as consumer spending continues, exports recover and business investment strengthens with support from fiscal measures. Following GDP growth of 1% in 2026, the economy is projected to expand by about 2% in both 2027 and 2028.

CPI inflation stays around 3% since April and is expected to rise to about 3.5% by year-end, driven in part by persistently high oil prices and elevated refinery margins. The Bank projects inflation remains at or above 3% through much of 2027 before returning close to its 2% target by the middle of 2028.

The central bank says higher gasoline, diesel and heating oil prices are directly hitting households and increasing production and transportation costs for businesses. While companies have mostly absorbed those pressures so far, the Bank says past experience and its surveys suggest cost pass-through will increase over the next year, raising the risk that energy-driven inflation becomes broader and more persistent.

Governing Council says future decisions will be taken one meeting at a time and signals that another rate increase could still be needed. The Bank says it will proceed carefully given uncertainty around the Middle East, Canada-U.S. trade relations, new U.S. tariffs and the extent to which energy costs spread more widely into consumer prices.

In our earlier article on the surge in oil shipping costs, we examined how conflict-related risks in key routes like the Strait of Hormuz and the Red Sea pushed tanker and insurance rates sharply higher, turning freight into a much larger share of crude prices. We also noted that these added transport costs can filter through into gasoline and broader consumer prices, intensifying inflation pressure for import-dependent markets while boosting tanker owners’ earnings.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.