The Bank of Canada raised its policy interest rate by 25 basis points on Oct. 29 as persistent energy costs increased the risk of broader inflation, the central bank said.
The increase brought the rate to 2.5%, the first rise since July 2023, the central bank said. The Bank for International Settlements published the remarks as “Release of the Monetary Policy Report” on Oct. 29.
The Bank of Canada said its inflation outlook had worsened since July, while its growth outlook had improved modestly despite continued U.S. trade restrictions. Its assessment covered economic activity through midyear, recent indicators and projections through 2028.
The central bank said consumer price inflation had hovered around 3% since April because of persistently high oil prices and higher margins at refineries. It expected inflation to reach about 3.5% by year-end.
The central bank projected inflation would remain at or above 3% through much of 2027 before returning close to its 2% target by mid-2028. It said households and businesses expected higher inflation soon, but their longer-term expectations remained stable.
The central bank said Canada's economy grew 3.3% in the second quarter, with recent indicators pointing to about 2% growth in the third. It projected growth of 1% in 2026 and about 2% in both 2027 and 2028, somewhat stronger than its July outlook.
The central bank said consumer spending held up despite slow population growth, while business investment recovered and exports strengthened. It expected new U.S. tariffs to slow fourth-quarter growth before spending, exports and investment supported a recovery in 2027.
The central bank said its Governing Council considered holding rates because price increases remained concentrated in energy and services that use it heavily, including air travel. Inflation excluding gasoline was 2.2%, while underlying inflation measures remained close to 2%.
The central bank said unemployment had stayed around 6.5% for several months and indicators showed spare capacity, meaning the economy could produce more without straining resources. It expected stronger growth to absorb that capacity, reducing its restraint on prices.
The central bank said businesses had mostly absorbed higher input costs, including imported industrial and electronics supplies. Its surveys and past experience suggested businesses would pass more costs to customers over the next year, keeping inflation elevated longer.
The central bank said uncertainty remained high over the Middle East war, Canada-U.S. trade relations, new American tariffs and how widely energy costs would spread. The council judged inflation risks had increased and agreed to decide policy one meeting at a time. Further increases could be needed, but it would proceed carefully.
