The Bank of Canada raised its overnight rate by 25 basis points to 2.5%, with the Bank Rate at 2.75% and the deposit rate at 2.45%. This decision comes amid a resilient global economy, despite higher energy prices. The U.S. economy continues to grow strongly, supported by consumer spending and AI-related investment. The euro area has also seen resilient growth, while China's economy rebounded in the third quarter due to strong exports and fiscal spending.
Globally, financial conditions have tightened since July, with higher sovereign bond yields and volatile equity and credit markets. The Canadian dollar has recovered to around 71 cents. In Canada, GDP growth was 3.3% in the second quarter and is expected to be about 2% in the third quarter, stronger than previously projected. Consumer spending remains solid, and business investment has rebounded, particularly in the oil and gas sector.
However, growth is expected to slow in the fourth quarter due to new U.S. tariffs before picking up in 2027. The Canadian economy is forecasted to grow 1% in 2026 and 2% in 2027 and 2028. Inflation has been around 3% since April and is expected to rise to 3.5% by year-end, driven by high oil prices and rising production costs. Core inflation remains close to 2%, but cost pressures are building.
The Bank of Canada's outlook is subject to considerable uncertainty, particularly regarding Canada-U.S. trade relations. Near-term inflation expectations have risen, while longer-term expectations remain stable.