Bank of Canada Raises Rates for First Time Since 2023 as Oil Prices Push Inflation

The Bank of Canada has raised interest rates for the first time in more than three years. It is trying to stop high oil prices from spreading into broader inflation.

On Oct. 28 the central bank increased its target for the overnight rate by 25 basis points to 2.5 per cent, with the Bank Rate at 2.75 per cent and the deposit rate at 2.45 per cent. It was the first interest rate increase since July 2023, Governor Tiff Macklem said.

Oil prices drove the decision

Macklem said the inflation outlook had worsened. "With the war in the Middle East persisting, global oil prices have increased and are expected to remain higher for longer," he said in his opening statement. "This is hitting Canadians at the gas pump and increasing costs for many businesses."

The Globe and Mail reported that oil prices had rocketed back above US$100 a barrel in recent weeks.

"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 told reporters.

The forecast

The bank's October Monetary Policy Report projects average inflation of 2.9 per cent in 2026 and 3.1 per cent in 2027, the Financial Post reported. Both are well above the July forecast. The Globe reported that the bank expects inflation to return to its 2-per-cent target in the middle of 2028.

Governing Council did weigh holding rates steady. Macklem said the main argument for a pause was that CPI inflation excluding gasoline is still 2.2 per cent, and that core measures remain close to 2 per cent. In the end, the council decided cost pressures were building.

Analysts on Bay Street expect the decision to be the start of a moderate tightening cycle, the Globe reported, though they disagree on how far the bank will go.

More hikes?

The bank left the door open. "There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully," Macklem said, according to the Globe. He said decisions would be made one meeting at a time.

Macklem also said the bank's estimate of the neutral rate is "a range" of 2.25 per cent to 3.25 per cent, so the new rate is still in the lower half of that band.

What it means for the GTA

The Globe noted that the hike will raise borrowing costs, particularly for homeowners with variable-rate mortgages. It also arrives while the housing market remains in a sustained slump and unemployment is elevated.

That is a tough mix for the Toronto region, where home prices and mortgage balances are among the highest in the country. Buyers and owners renewing in the coming months will likely face higher payments.

The rate hike also adds pressure on governments. Ontario's fall economic statement already projects $17.4 billion in interest costs this year.

The Bank of Canada's next rate announcement is scheduled for December. Read the full statement via the Financial Post.