The Bank of Canada raised its overnight rate target by 25 basis points to 2.5%. It cited higher and more persistent inflation in its outlook, and said further increases may be needed, though it will proceed carefully.
The Bank of Canada increased its target for the overnight rate by 25 basis points to 2.5%. The Bank Rate now stands at 2.75% and the deposit rate at 2.45%.
Governing Council said it decided to raise the policy rate to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services. There could be a need to increase the policy rate further, but given uncertainties the Council agreed to proceed carefully.
Canadian dollar recovers to around 71 cents
The Bank said the Canadian dollar had weakened somewhat on US-dollar strength but has since recovered to around 71 cents, the same level it assumed in the July Report.
Global financial conditions have tightened since July, according to the Bank. Advanced economy sovereign bond yields are higher, and equity and credit markets have been volatile on uncertainty about the outlook for the AI sector.
Inflation forecast rises on energy costs
Given persistently high oil prices, CPI inflation has been around 3% since April and is expected to rise to about 3½% by the end of the year. Excluding gasoline, inflation was 2.2% in September, and measures of core inflation remain close to 2%.
The Bank now projects that CPI inflation will average 3% in 2027, a percentage point above the July projection, before it comes down to 2% in the middle of 2028. It named developments in the Middle East and businesses' responses to cost pressures as the main sources of uncertainty.
Growth outlook faces tariff drag
Canadian GDP growth was 3.3% in the second quarter, and recent indicators point to growth of about 2% in the third quarter. Owing to new US tariffs, however, growth is expected to slow in the fourth quarter of 2026 before picking up again in 2027.
The Bank expects the economy to grow 1% in 2026, and 2% in 2027 and 2028, and calls the forecast subject to considerable uncertainty, particularly regarding Canada-US trade relations.
Its next scheduled announcement of the overnight rate target is December 9, 2026.
Source: ActionForex
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