The Bank of Canada raised its key interest rate by 25 basis points to 2.5%, marking its first hike since July 2023. The move aims to curb inflation and mitigate the risk that surging fuel prices could drive broader economic inflation. Governor Tiff Macklem emphasized that the outlook for inflation has worsened since the bank's July report, citing persistent geopolitical tensions and elevated energy costs as major concerns.
In its October Monetary Policy Report, the Bank of Canada highlighted that high energy prices have not yet spread widely but warned that cost pressures are mounting. Businesses surveyed by the central bank indicated a 60% likelihood of passing increased costs to consumers over the next year. Brent crude oil averaged $124.96 per barrel in October, up $35 from July, due to the ongoing war in the Middle East.
Despite these challenges, Canada's economy showed resilience, growing 3.3% in the second quarter, though this is expected to slow to 2% in the third quarter. Macklem attributed the growth to strong consumer spending and rebounding business investment, particularly in the oil and gas sector. However, he cautioned that new U.S. tariffs could weigh on economic activity in the fourth quarter.
The unemployment rate has stabilized around 6.5%, suggesting difficulties for job seekers. While the bank projects a economic rebound in 2027, Macklem noted that inflation risks limit the scope for further monetary easing. He left the door open for additional rate hikes, stating that the bank will proceed cautiously given the uncertainties.