Policy rate rises to 2.5 percent as energy inflation persists
Bank of Canada (BoC) Governor Tiff Macklem told a Senate committee in Ottawa that the bank raised its policy rate by 25 basis points to 2.5 percent last week. Higher energy costs and a more resilient economy drove the decision.
Energy costs prolong inflation
Macklem appeared with Senior Deputy Governor Carolyn Rogers to discuss the decision and Monetary Policy Report.
The increase was the first since July 2023.
Persistent war in the Middle East has raised oil prices; elevated refinery margins add pressure.
CPI inflation has been around 3 percent since April 2026.
The BoC projects about 3.5 percent by year-end, at least 3 percent through much of 2027 and a return close to its 2 percent target by mid-2028.
Gasoline, diesel and heating oil costs affect consumers and business production and transport.
Firms have mostly absorbed higher costs, but surveys and past experience point to greater pass-through over the next year.
Governing Council raised rates to limit the risk of energy costs becoming generalized inflation.
Recovery faces another tariff test
GDP grew 3.3 percent in Q2 2026; indicators point to about 2 percent in Q3. Consumer spending was solid, while exports and business investment rebounded.
Unemployment stayed around 6.5 percent for several months, with some excess supply remaining.
New US tariffs are projected to slow Q4 growth.
The BoC forecasts 1 percent growth in 2026 and about 2 percent in both 2027 and 2028.
Consumption, exports and business and government investment support recovery, with fiscal measures helping business investment.
Recovery leaves less downward price pressure to offset energy costs.
Further increases remain conditional
Governing Council judged inflation risks higher and saw less scope for monetary accommodation.
Macklem said further rate increases might be needed, but decisions would proceed carefully, one meeting at a time.
Middle East developments, Canada-US trade relations, tariff effects and energy pass-through remain uncertain.