The Bank of Canada raised its key interest rate by a quarter point to 2.5% on Wednesday, its first increase in more than three years, and warned that further hikes may be needed to stop soaring energy costs from feeding into broader inflation.
"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 generalised inflation," Governor Tiff Macklem said. "There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully."
According to sources, Canada's annual inflation rate reached 3.2% in September, above the bank's 1% to 3% target range, driven almost entirely by energy and transport costs. The bank raised its 2027 inflation forecast to 3.1% from the 2% it projected in July. Macklem said inflation is expected to end this year at 3.5% and only return close to the 2% target by mid-2028.
The bank lifted its growth forecast for this year to 1% from 0.7%, but expects growth to slow to 0.8% in the fourth quarter as new US tariffs bite. Some economists opposed the move, arguing that core inflation is still around 2% and that higher rates could hurt a modest recovery and a weak job market. High oil prices linked to the war in the Middle East are posing a growing challenge for central banks worldwide.