Bank of Canada increases policy interest rate for the first time in three years | Daily Hive

Bank of Canada increases policy interest rate for the first time in more than three years

TD Canada Trust Tower in Downtown Toronto. (The Bold Bureau/Shutterstock)

The Bank of Canada raised its policy interest rate by a quarter of a percentage to 2.5 per cent on Wednesday, Oct. 28, 2026, warning that persistently high global oil prices could fuel the return of broader inflation.

This increase of 0.25 per cent is the central bank’s first increase to the policy interest rate in more than three years — since July 2023 — and ends a year of holding the rate at 2.25 per cent.

The central bank pointed to the prolonged United States-led conflict in the Middle East, which has kept oil prices elevated and increased production and transportation costs. While businesses have largely absorbed those increases so far, the central bank’s surveys suggest more costs will be passed on to consumers over the coming year.

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Canada’s inflation is expected to reach about 3.5 per cent by the end of 2026 and average three per cent in 2027 before returning to the central bank’s two per cent target in mid-2028.

Tiff Macklem, the governor of the Bank of Canada, signalled that further increases remain possible in the next scheduled updates.

The central bank’s next three policy interest rate announcements are scheduled for Dec. 9, 2026, Jan. 27, 2027, and March 3, 2027.

“There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully. The Bank remains committed to maintaining Canadians’ confidence in price stability,” reads Macklem’s announcement.

The decision also reflects a somewhat stronger economic outlook. The central bank forecasts Canadian growth of one per cent this year and two per cent in both 2027 and 2028, although uncertainty over U.S. tariffs and trade relations remains significant.

Reacting to the central bank’s first policy interest rate hike in years, TD Bank economist Marc Ercolao described the increase as a precaution against the risk that persistently high oil prices will fuel broader inflation.

“In a world of higher oil prices, the Bank of Canada is hiking from a risk management perspective to ensure inflation remains on target in the months ahead,” wrote Ercolao.

Ercolao suggested Canada’s economy can likely withstand the 0.25 per cent increase, but cautioned that it still faces trade uncertainty with the U.S., limited employment growth, and tighter financial conditions caused by rising global bond yields.

He suggested another 0.25 per cent increase, bringing the policy rate to 2.75 per cent, would provide additional protection against persistent inflation driven by soaring oil costs.

Beyond that, Ercolao expects the central bank to proceed more cautiously, balancing inflation concerns against the risk that raising borrowing costs too far could undermine Canada’s continued long road to economic recovery.

But efforts to contain inflation could also worsen housing affordability in Canada, putting homeownership further out of reach for some buyers and slowing an already extremely fragile housing market recovery, especially in the major markets of Metro Vancouver and Greater Toronto.

Royal LePage president and CEO Phil Soper warned that today’s higher borrowing costs will add pressure to an already weak housing sector, with consequences for employment and consumer spending.

“Canada’s housing sector is a powerful engine of economic activity, supporting employment and consumer spending across the economy. Its prolonged weakness is already weighing on economic growth, and higher borrowing costs will only deepen that challenge,” said Soper.

Soper said the central bank faces a difficult balance between supporting a fragile economy and containing inflation driven by war and tariffs. He suggested the implications for housing will depend heavily on whether further increases follow in the next scheduled updates.

“For prospective homebuyers and the broader economy, the critical question is whether this is a one-time adjustment or the beginning of a sustained tightening cycle. Much will depend on whether inflationary pressures remain concentrated in energy or spread more broadly across the economy,” continued Soper.

The higher variable mortgage rates could reduce homebuyers’ purchasing power. As lenders adjust their prime rates, homeowners with adjustable-rate mortgages will face higher monthly payments, while those with fixed-payment variable mortgages will see more of each payment go toward interest rather than paying down their principal.

bank of canada policy interest rate history

History of the Bank of Canada’s policy interest rate changes from January 2020 to October 2026. (Royal LePage)

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