The Bank of Canada raised its policy interest rate by 25 basis points to 2.5%, marking the first increase since July 2023. This decision comes amid deteriorating inflation outlook due to persistent Middle East conflict and higher global oil prices, which are expected to remain elevated for longer. The bank noted that these factors are increasing costs for consumers and businesses, particularly at the gas pump.
Despite ongoing trade tensions with the United States, Canada's economic growth has shown resilience. GDP growth was 3.3% in the second quarter and is projected to be around 2% in the third quarter. Consumer spending has remained solid, and business investment has rebounded, particularly in the oil and gas sector. However, new US tariffs are expected to weigh on growth in the fourth quarter.
The bank's Governing Council considered both holding and hiking the interest rate. The argument for holding was that inflation has been concentrated in energy prices and related services, with core inflation measures remaining close to 2%. The argument for hiking was that higher energy prices are expected to persist and could spill over into broader consumer prices, increasing the persistence of inflation.
Looking ahead, the bank projects GDP growth of about 2% in 2027 and 2028, absorbing the remaining economic slack. Inflation is expected to remain at or above 3% through much of 2027 before returning close to the 2% target by the middle of 2028. The bank will proceed carefully with future decisions, taking them one meeting at a time.