The Bank of Canada raised its key interest rate on Wednesday 28 October, lifting the target for the overnight rate by a quarter of a percentage point to 2.5 per cent. It was the central bank's first increase since July 2023 and its first policy move in almost a year. The Bank Rate rose to 2.75 per cent and the deposit rate to 2.45 per cent. Governor Tiff Macklem said the increase was needed to reduce the risk that higher energy prices spread more widely through the economy, adding: “There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully.”

Energy inflation drove the decision

Annual inflation reached 3.2 per cent in September, above the bank's 1 to 3 per cent target range, driven almost entirely by energy and energy-related transport costs, according to Reuters' report of the decision. The bank raised its 2027 inflation forecast to 3.1 per cent, up from the 2.0 per cent it had projected in July, while lifting its 2026 growth forecast to 1.0 per cent from 0.7 per cent.

Markets price in more tightening

Canadian bond yields rose after the announcement. The two-year yield touched 3.441 per cent, its highest since August 2024, before easing back to 3.413 per cent, while the ten-year yield rose 2.4 basis points to 3.885 per cent. The Canadian dollar traded 0.1 per cent higher at 1.4035 per US dollar, or 71.25 US cents. Investors priced a 45 per cent chance of a December move, with a second increase fully priced by January.

Sources: Reuters and Reuters, markets.