‘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,’ Bank of Canada Governor Tiff Macklem said at a press conference Oct. 28. / SCREENSHOT
The Bank of Canada raised its benchmark interest rate this week and economists say there could be more increases to come.
“Canada will likely see higher rates in the year ahead,” RBC chief economist Frances Donald and assistant chief economist Nathan Janzen wrote in a report after the BoC decision.
“Yet, the concerns around future inflation, coupled with a stronger economic growth outlook conveyed that today's rate decision was essentially a risk management hike.”
The Bank of Canada raised its overnight policy rate 25 basis points to 2.5%. It was the first increase since July 2023. Governor Tiff Macklem said since the bank’s July report, the inflation outlook had worsened and the economy had strengthened.
“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 in his opening remarks on Wednesday.
He didn’t rule out further increases: “Looking ahead, Governing Council agreed we would take future decisions one meeting at a time. There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully.”
Donald and Janzen said the next moves depend on how economic growth and inflation data evolve, and “the economy isn’t likely to be knocked off course by this or a few more rate hikes.” They said they believe another hike could come in December or January but it would remain in the “neutral range.” National Bank of Canada economists also predict a December rate hike.
Meanwhile, Andrew DiCapua, principal economist at the Canadian Chamber of Commerce’s Business Data Lab, described the increase as “an insurance policy” rather than the beginning of more hikes.
“Inflation pressures haven’t eased enough to reassure the Bank, and this move signals it is taking the supply shock seriously, even with the economy running well below full strength. But its decision is predicated on stronger economic growth ahead, and that assumption will be tested, especially with the labour market still showing signs of slack,” DiCapua told Means & Ways in a statement. “... We expect the Bank to be patient from here. It has shown it is willing to act on inflation, but there are serious doubts about the economy’s ability to absorb meaningfully higher borrowing costs.”
Macklem said the economy gained momentum mid-year, with GDP growing 3.3% in the second quarter and an estimated 2% in the third, supported by resilient consumer spending, stronger business investment and rising exports despite U.S. tariffs. Growth is expected to slow in the fourth quarter before recovering to about 2% in both 2027 and 2028. Inflation is projected to rise to 3.5% by year-end, remain elevated through much of 2027 and gradually return to the Bank of Canada’s 2% target by mid-2028.
Asked about the message to businesses affected by tariffs, Macklem said a rate hike might not be best for them in the short term, but the best thing the Bank of Canada can do is keep inflation under control, which would create more certainty.
On the growth outlook, Macklem said he expects projects approved by the Major Projects Office could begin to “take shape” next year, while the mega tax deduction will go a long way to more investments.
The next interest rate decision will be Dec. 9.
