Bank of Canada Raises the Policy Rate to 2.5%, Its First Increase Since July 2023
The Bank of Canada raised its target for the overnight rate by 25 basis points to 2.5% at 09:45 ET this morning, with the Bank Rate at 2.75% and the deposit rate at 2.45%. Governor Tiff Macklem named the significance of it in one line: “This is the first interest rate increase since July 2023.”
The last increase, to 5.00%, came on July 13, 2023, 1,203 days ago. In between the Bank cut 275 basis points across nine cuts between June 6, 2024 and October 30, 2025, taking the rate to 2.25%, then left it there for 363 days, two days short of a year.
The reason in the Bank’s press release is one sentence: “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.” Macklem named the conflict behind those energy prices in his opening statement: “With the war in the Middle East persisting, global oil prices have increased and are expected to remain higher for longer.” On the day of the decision, oil settled at $102.76, up 2.89% from $99.87 the session before. NYMEX WTI, December contract, settlement window 2:28 to 2:30 p.m. ET, our calculation from Yahoo Finance trade data.
The Bank wrote this trigger down in September
In the summary of its September 2 deliberations, published September 16, Governing Council recorded that “while there was little evidence thus far that high gasoline prices were passing through to other goods and services, members agreed that the longer they were high, the more likely they would be passed through.” The same document named the consequence: a spillover into other components of the CPI “could require a monetary policy response to prevent broad-based inflation from setting in.”
Macklem reached for almost the same words today: “As we’ve been saying for some time, the longer energy prices remain high, the more likely it is these costs will spill over to consumer prices more broadly.”
We built a piece on those two sentences on September 21, five weeks before the Bank delivered the response they contemplated, and it carried the first version of the screen below: the rate hike trigger the Bank put in its own deliberations.
Both of the Bank’s preferred core measures sit below 2%
Statistics Canada reported in its September CPI release on October 19 that headline inflation rose 3.1% year over year after 3.0% in August, led by gasoline, up 27.8% against 22.8%. The same release reads: “Excluding gasoline, the CPI rose 2.2%, after increasing 2.4% in August.” Energy as a whole was up 19.0% after 15.4%, while food from stores rose 1.7% and shelter 1.8%.
The Bank’s two preferred core measures were quieter still. CPI-trim ran at 1.8% in September and CPI-median at 1.9%, and neither has been above 2.0% in any of the four months through September: trim 1.9% in August, July and June, median 2.0%, 2.0% and 1.9%. The Bank’s own words for the same measures: “CPI inflation excluding gasoline is still 2.2%, and measures of core inflation remain close to 2%.”
So the Bank raised rates with both of its own preferred core measures below the 2% target, and with one of the gauges it pointed at, CPI excluding gasoline, having eased in September. It is not responding to a pass-through it has measured. It is responding to one it expects, and it says so: “While businesses have mostly absorbed higher input costs so far, past experience and Bank surveys suggest that cost pass-through will increase over the next year.”
The forecast behind that is in the press release. CPI inflation has been around 3% since April and is expected to reach about 3½% by the end of the year, then average 3% in 2027, a percentage point above the July projection, before coming back to 2% in the middle of 2028. The Bank describes the conflict as “now in its eighth month” with “no clear path to resolution”, and it puts the economy on the same side of the decision: GDP grew 3.3% in the second quarter and unemployment “has been around 6½% for several months”. Macklem’s own summary of the case: “With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation.”
The Bank published both of its arguments
It did not leave the counter-case to its critics. The opening statement says: “Against this backdrop, Governing Council considered two policy options: hold or hike.”
For holding: “The main argument for holding was that the rise in inflation has so far been concentrated in energy prices and in services that rely heavily on energy inputs, such as airfares.” It added that “while growth has been better than expected, economic slack remains, and new US tariffs will weigh on growth.”
For raising: “The main argument for an increase was that energy prices are higher, they are expected to remain higher, and cost pressures are building.”
Our precedent screen, re-run over the full published series
We screen for the configuration Canada is in now: months where headline CPI sits at least 1.1 percentage points above CPI-trim year over year, and CPI-trim itself sits at or below 2.0%. September 2026 qualifies on a 1.3 point gap, 3.1% against 1.8%. That is the same definition we used on September 21, now run over the full published CPI-trim series, which begins in June 1994. Of the 388 months to September 2026, 14 qualify.
| Month | Headline | CPI-trim | Gap |
|---|---|---|---|
| February 2000 | 2.7% | 1.6% | 1.1 |
| March 2000 | 3.0% | 1.6% | 1.4 |
| July 2000 | 2.9% | 1.8% | 1.1 |
| November 2000 | 3.2% | 2.0% | 1.2 |
| September 2005 | 3.2% | 1.8% | 1.4 |
| March 2011 | 3.3% | 1.6% | 1.7 |
| April 2011 | 3.3% | 1.5% | 1.8 |
| May 2011 | 3.7% | 1.8% | 1.9 |
| June 2011 | 3.1% | 1.8% | 1.3 |
| August 2011 | 3.1% | 2.0% | 1.1 |
| May 2026 | 3.2% | 2.0% | 1.2 |
| July 2026 | 3.0% | 1.9% | 1.1 |
| August 2026 | 3.0% | 1.9% | 1.1 |
| September 2026 | 3.1% | 1.8% | 1.3 |
In 2000 the Bank was already tightening before the configuration appeared. On the Bank Rate, the monthly series available for that period, it moved from 4.75% in June 1999 to 6.00% by May 2000, held there through the July and November qualifying months, and did not cut until January 2001. September 2005 was the same shape: the Bank Rate stood at 3.00% that month and reached 4.50% by May 2006, which on the overnight target basis 25 basis points below is 2.75% to 4.25%, 150 basis points in eight months.
The five 2011 months are the opposite. The target for the overnight rate was 1.00%, where it had been since September 2010, and it did not move at all. Its next change in either direction was a cut to 0.75% on January 21, 2015. Then 2026, four qualifying months, with the rate at 2.25% since October 30, 2025, and today an increase.
The finding is ours: today is the first time in the published series that the Bank has started a tightening cycle from a hold with headline this far above a trim measure below target.
The caveat travels with it. Fourteen qualifying months is not fourteen independent observations: it is four episodes, one of them the present one, and the months inside each are calendar-year groupings rather than continuous spells. Only one prior episode found the Bank on hold when the configuration appeared, so the comparison behind that sentence rests on 2011 alone. That is a description of a short record, not a probability attached to anything.
What the increase costs a borrower
BMO moved the same day, announcing that “it is increasing its CDN$ prime lending rate from 4.45 per cent to 4.70 per cent, effective October 29, 2026”. The Bank of Canada’s chartered bank prime series read 4.45% at its October 21 weekly observation, 2.20 percentage points above the old policy rate, and BMO’s 4.70% sits 2.20 points above the new one. At BMO, the quarter point passed through in full.
On a $500,000 balance, 25 basis points is $1,250 a year of additional interest in the first year, about $104 a month, falling as the balance amortizes. That is an interest cost rather than a payment change: on a fixed-payment variable mortgage the payment does not move and more of each one goes to interest.
Fixed-rate borrowers are untouched. Five-year fixed pricing tracks the five-year Government of Canada yield, which closed at 3.57% on Tuesday, October 27, the last published session before the decision, and sat between 3.56% and 3.58% across the three published sessions through Tuesday.
What the market had been pricing going in
On the October 9 settlement, Montreal Exchange one-month CORRA futures priced 5.5 basis points of increase into today’s decision and 20.4 into December 9, putting the move in December rather than October. That solve is in our October 13 piece on the Bank’s rate path after the September jobs report.
The bond market carried a different kind of message. On Tuesday’s close the Government of Canada two-year yield was 3.36%, 111 basis points above the then-2.25% policy rate, with the ten-year at 3.83%. A two-year sitting that far above the overnight rate is not the shape of a curve that expects the policy rate to stay put.
The index closed higher, its rate-sensitive corners lower
The S&P/TSX Composite finished at 36,265.09, up 0.24%. The Canadian dollar rose 0.39% to 0.7145 against the US dollar, and gold closed at $4,078.80, up 0.1%.
On the iShares sector funds we use as proxies for the TSX sectors, technology led at 1.76% and energy added 1.07%, while the two most rate-sensitive corners of the index fell: real estate 0.83% and utilities 0.54%. Consumer staples, down 0.79%, sat between them.
Real estate is the corner worth following here: Canadian REITs borrow to hold their buildings and distribute what is left, so the overnight rate reaches them through their borrowing costs. Our ranking of Canadian REITs is where we cover them.
The Fed held the same day, and two members wanted to raise
The Federal Open Market Committee decided the same day “to maintain the target range for the federal funds rate at 3-3/4 to 4 percent”, on a 10 to 2 vote. Its read of conditions was not soft: “Economic activity is expanding at a strong pace”, and “Inflation remains elevated.”
The dissents are the part that rhymes with Ottawa: “Voting against the monetary policy action were Lisa D. Cook and Beth M. Hammack, who preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting.”
The gap between the Bank’s 2.5% target and the midpoint of the Fed’s 3.75% to 4% range narrows to 1.375 percentage points from 1.625.
The next decision is December 9
The Bank gave itself no path. “Looking ahead, Governing Council agreed we would take future decisions one meeting at a time. There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully.”
December 9 is the next scheduled announcement, with the next Monetary Policy Report on January 27, 2027. One more CPI print lands before that decision, October’s, on November 16. It is where the Bank finds out whether the pass-through it raised rates against arrives. Core inflation below target is the argument for stopping here. The forecast is the argument for not.
Data as of October 28, 2026. Rates and rate history: Bank of Canada. CPI: Statistics Canada, September 2026. Bond yields: October 27, 2026 close. Prime change effective October 29, 2026. Index, currency and sector readings: October 28 closes.
Disclaimer: The content on bestcanadianstocks.ca is for informational and entertainment purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always consult a qualified financial advisor before making investment decisions. Policy rate, Bank Rate, deposit rate, the forecast and all quoted decision language are from the Bank of Canada’s October 28, 2026 press release and Governor Macklem’s opening statement of the same date, with the September 2 deliberations summary published September 16. CPI figures are Statistics Canada’s September 2026 release of October 19, 2026, with CPI-trim and CPI-median from the StatCan Web Data Service. Prime is BMO’s own newsroom release of October 28, 2026. Bond yields are Bank of Canada Valet benchmark series at the October 27, 2026 close, the last published session before the decision. The FOMC statement is the Federal Reserve’s of October 28, 2026. Oil is the NYMEX WTI December contract settlement-window price. The precedent screen over 388 months from June 1994 is our own, computed from the published CPI-trim series.
