Bank of Canada raises policy interest rate at October meeting

Economic insights
Oct 28, 2026

First National Financial LP

For the first time since 2023, Canada’s central bank has chosen to increase its policy interest rate in reaction to changing economic data.

The change brings the rate to 2.50% from 2.25%. To understand the Bank’s rationale for this decision, we summarize its October 28, 2026 observations and outlook below.

Inflation

Given persistently high oil prices, inflation, measured by the Consumer Price Index (CPI), has been around 3% since April and is expected to rise to about 3.5% by the end of 2026
Excluding gasoline, inflation was 2.2% in September, and measures of core inflation remain close to 2%
Cost pressures are building, with high fuel prices raising the costs of production and transportation
Imported industrial and electronics input prices have also increased
While businesses have mostly absorbed higher input costs so far, Bank surveys suggest cost pass-through will increase over the next year

Canadian Economic Performance

Growth picked up in Canada through the middle of the year with Gross Domestic Product of 3.3% in the second quarter, and recent indicators pointing to growth of about 2% in the third quarter
This is stronger than expected in the Bank’s July report
Consumer spending has been solid, even with “slow population growth”
Business investment rebounded, reflecting oil and gas sector activity and spending on machinery and equipment
Despite ongoing weakness in sectors affected by US tariffs, Canadian exports overall have strengthened, owing to robust US demand, higher energy production and increasing signs that businesses are adapting to the changing trade environment

Canadian employment and f/x

The unemployment rate has been around 6.5% for several months and a broad set of indicators continue to point to some excess supply in the economy
The Canadian dollar had weakened somewhat on US-dollar strength but has since recovered to around 71 cents – the same as assumed in the Bank’s July report

Global economic commentary including bond yields

Global financial conditions have tightened since July
Advanced economy sovereign bond yields are higher
Since the July Monetary Policy Report, global economic activity has remained resilient, despite higher energy prices
In the United States, the economy continues to grow at a robust pace, supported by consumer spending and AI-related investment
Growth in the euro area has been resilient and broad-based
After slowing in the second quarter, Chinese growth rebounded in the third quarter, owing to strength in exports and a pickup in fiscal spending
With persistently elevated oil prices and refinery margins, inflation has risen in most countries
Equity and credit markets have been volatile due to uncertainty about the outlook for the AI sector

Rationale for Today’s Decision

In commenting on its decision to increase its policy rate, the BoC made several comments:

Inflation is higher and more persistent than in the July Report
Growth has picked up this year and is expected to recover further
Against this backdrop, Governing Council decided to increase the policy rate to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services

Outlook for housing, and the Canadian and global economies

Owing to new US tariffs, growth is expected to slow in the fourth quarter of 2026, before picking up again in 2027. This rebound is supported by business investment, exports and fiscal measures. Consumption growth is expected to moderate and housing to remain relatively weak.

The Bank expects the Canadian economy to grow 1% in 2026, and 2% in 2027 and 2028. This is a somewhat stronger overall growth projection than what was found in the BoC’s July Report. However, the Bank’s statement noted that “this forecast is still subject to considerable uncertainty, particularly regarding Canada-US trade relations.”

The conflict in the Middle East is now in its eighth month and there is no clear path to resolution. The combination of higher-for-longer energy prices and increased pass-through adds to the persistence of inflation in the projection.

CPI inflation is expected to average 3% in 2027, a percentage point above the July projection, then come down to 2% in the middle of 2028. The main sources of uncertainty around this forecast are developments in the Middle East and businesses’ responses to cost pressures. Given the ongoing resilience of the global economy, the Bank has revised up global GDP growth slightly to 3.1% in 2026, while growth in 2027 and 2028 remains unchanged from the July projection at 3.2%.

Outlook for interest rates

The Bank admitted that “there could be a need to increase the policy rate further” after today’s announcement. However, it added that “given uncertainties, Governing Council agreed to proceed carefully.”

Once again, the Bank concluded by saying it remains committed to maintaining Canadians’ confidence in price stability.

Next up

The Bank is scheduled to make its final policy interest rate decision of 2026 on December 9^th. First National’s executive summary will follow. In the meantime, please visit this website for other important insights.