Forex

Bank of Canada Raises Rate to 2.5% in First Hike Since July 2023 as Canadian Dollar Holds Steady

The Bank of Canada raised its policy rate 25 basis points to 2.5% on Wednesday to keep high energy prices from spreading, while USD/CAD stayed near 1.404 ahead of the Fed decision.

Oct 28, 2026 - 12:24

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The Bank of Canada raised its key interest rate on Wednesday, October 28, 2026, for the first time since July 2023, saying it wants to reduce the risk that persistently high energy prices spread to the prices of other goods and services. The Canadian dollar showed little reaction to the widely expected move.

The bank increased its target for the overnight rate by 25 basis points to 2.5%, with the Bank Rate at 2.75% and the deposit rate at 2.45%. "There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully," the bank said in its statement.

Inflation outlook raised

With persistently high oil prices, CPI inflation has been around 3% since April and is expected to rise to about 3.5% by the end of the year, the bank said. Excluding gasoline, inflation was 2.2% in September, and measures of core inflation remain close to 2%. The bank now expects CPI inflation to average 3% in 2027, a percentage point above its July projection, before coming down to 2% in the middle of 2028. XTB, citing the bank's projections, put the 2027 figure at 3.1%.

The bank said cost pressures are building, with high fuel prices raising production and transportation costs and imported industrial and electronics input prices also rising. "While businesses have mostly absorbed higher input costs so far, Bank surveys suggest cost pass-through will increase over the next year," the statement said. It described the conflict in the Middle East as "now in its eighth month" with "no clear path to resolution."

Growth forecast revised up

Canadian GDP grew 3.3% in the second quarter, and recent indicators point to growth of about 2% in the third quarter, stronger than the bank expected in July. The bank projects growth of 1% in 2026 and 2% in both 2027 and 2028, and said growth is expected to slow in the fourth quarter because of new U.S. tariffs. The Globe and Mail reported that the bank sees fourth-quarter growth of 0.8% and that the 2027 and 2028 projections were raised from 1.8%. The unemployment rate has been around 6.5% for several months, and the bank said a broad set of indicators continue to point to some excess supply in the economy.

Globally, the bank revised its GDP growth estimate up slightly to 3.1% for 2026 and left its projection of 3.2% for 2027 and 2028 unchanged.

Macklem: hold or hike

In his opening statement, Governor Tiff Macklem said Governing Council considered two options. "The main argument for holding was that the rise in inflation has so far been concentrated in energy prices and in services that rely heavily on energy inputs, such as airfares," he said. "The main argument for an increase was that energy prices are higher, they are expected to remain higher, and cost pressures are building."

"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," Macklem said, adding that future decisions would be taken one meeting at a time. According to FXStreet, Macklem also told reporters that the policy rate, even with the hike, "is low enough that it is not restraining growth" and that "there is no predetermined path for rates."

The Globe and Mail reported that the increase will most directly raise borrowing costs for homeowners with variable-rate mortgages, and that financial markets expect further increases over the next year.

Loonie reaction

The U.S. dollar was little changed against its Canadian counterpart after the announcement. FXStreet said USD/CAD traded around 1.4050 after swinging in both directions in the immediate reaction, while XTB put the pair near 1.4040. Around 12:13 p.m. ET, Yahoo Finance data showed USD/CAD at about 1.4036, little changed on the day, in an intraday range of about 1.4023 to 1.4068. In its statement, the Bank of Canada said the Canadian dollar had weakened somewhat on U.S. dollar strength but had since recovered to around 71 U.S. cents.

FXStreet said the U.S. dollar index was hovering near two-week highs around 102.40 ahead of the Federal Reserve's decision at 2 p.m. ET, where policymakers are widely expected to leave rates unchanged at 3.75% to 4.00%. The European Central Bank and the Bank of Japan are also scheduled to announce policy decisions this week, Kitco News reported.

The Bank of Canada's next scheduled rate announcement is December 9, 2026, and its next Monetary Policy Report will be released on January 27, 2027.