Bank of Canada raises key interest rate to 2.5%, its first increase since 2023

The Bank of Canada raised its benchmark overnight rate by 25 basis points to 2.5% on Wednesday 28 October, its first increase since July 2023. The decision was announced at 1:45pm GMT.

“With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation,” Governor Tiff Macklem said in his opening statement, according to The Globe and Mail.

In its quarterly Monetary Policy Report, the bank said consumer price inflation had been around 3% since April and was expected to rise to about 3.5% by the end of the year, staying at or above 3% through much of 2027 before returning close to its 2% target by mid-2028. It raised its 2027 inflation forecast to 3.1% from 2.0% in July, The Globe and Mail reported.

Macklem said there “could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully,” and that decisions would be taken one meeting at a time. Deputy Governor Carolyn Rogers said the council debated a hold and an increase and reached “a very strong consensus.”

Economists were divided. David Rosenberg of Rosenberg Research called the move “totally unnecessary and premature,” while Desjardins’ Royce Mendes said it “reduces the risk of a painfully aggressive tightening cycle down the road.”

The next decision is due on 9 December.

See also: this week’s central bank decisions.