The Bank of Canada announced a 25 basis point increase in its policy interest rate, bringing it to 2.5%. This marks the first rate hike since July 2023. The decision comes amid deteriorating inflation outlook due to persistent conflict in the Middle East, which has driven up global oil prices. Higher energy costs are impacting consumers at the gas pump and increasing business expenses.
Despite trade actions by the United States, Canada's economic growth has shown modest improvement. GDP growth reached 3.3% in the second quarter and is expected to be around 2% in the third quarter. Consumer spending remains strong, and exports and business investment are rebounding. The unemployment rate has stabilized at 6½%. However, growth is projected to slow in the fourth quarter due to new US tariffs before picking up in 2027.
Inflation has been around 3% since April and is expected to rise further by year-end. Elevated energy prices and higher refinery margins are contributing to persistent inflation, which is projected to remain above 3% through much of 2027 before returning to the 2% target by mid-2028. The Bank of Canada emphasized that future rate decisions will be made cautiously, considering the uncertainties in global and trade relations.
The Bank remains committed to maintaining price stability amid global upheaval. While the policy rate may need to be raised further, the Governing Council will proceed carefully, taking decisions one meeting at a time.