Policy rate rises to 2.5 percent as energy inflation persists
Bank of Canada Governor Tiff Macklem announced a 25 basis point policy rate increase to 2.5 percent, the first increase since July 2023. Higher energy costs and a more resilient economy drove the decision to limit broader inflation pressures.
Inflation outlasts the energy shock
Macklem and Senior Deputy Governor Carolyn Rogers presented the decision in Ottawa.
Middle East conflict has lifted oil prices; high refinery margins add pressure.
CPI inflation, around 3 percent since April, is projected at about 3.5 percent by year-end, at or above 3 percent through much of 2027 and near the 2 percent target by mid-2028.
Near-term inflation expectations rose; longer-term expectations remain anchored.
GDP grew 3.3 percent in Q2, with indicators pointing to about 2 percent in Q3. Unemployment stayed around 6.5 percent, with excess supply remaining.
The Bank projects 1 percent growth in 2026 and about 2 percent in both 2027 and 2028, absorbing slack.
Growth prospects improved modestly from the July Report despite US trade actions.
Holding rates had a case
Governing Council weighed holding against raising rates: inflation excluding gasoline was 2.2 percent, core measures near 2 percent and slack persisted.
New US tariffs are projected to slow Q4 growth.
The case for raising rested on persistent energy costs and broader pass-through.
Fuel prices exceed July levels; imported industrial and electronics inputs also cost more.
Firms mostly absorbed costs, but surveys and past experience point to greater pass-through over the next year.
Consumption, exports and investment supported by fiscal measures underpin the projected 2027 recovery.
Further increases remain conditional
The Council judged inflation risks higher and room for monetary accommodation smaller as the economy proved resilient.
It will decide one meeting at a time, with further rate increases possible.
Uncertainty over the Middle East, Canada-US trade and cost pass-through limits its commitment to a future rate path.
Source: Release of the Monetary Policy Report
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