Bank of Canada Raises Key Rate to 2.5%, Signals Further Hikes Possible to Curb Inflation

The Bank of Canada raised its key policy rate by 25 basis points to 2.5% on Wednesday, its first hike in more than three years, and said further increases may be needed to prevent elevated energy costs from fueling broader inflation. The bank lifted its 2027 inflation forecast to 3.1% from 2.0% and now projects 1.0% growth this year, up from 0.7% seen in July. Annual inflation hit 3.2% in September, above the bank's 1%-3% target range, driven almost entirely by energy and energy-related transportation costs. Governor Tiff Macklem said inflation is expected to end the year at 3.5% and stay near 3% for most of next year before returning close to the 2% target by mid-2028. "There could be a need to increase the policy rate further, but given uncertainties, we will proceed carefully," Macklem said. The rate remains below the bank's estimated neutral midpoint of 2.75%. The BoC projected growth slowing to 2% in the third quarter and 0.8% in the fourth, citing new US tariffs, while upgrading its 2027 and 2028 GDP forecasts to 2%. The Canadian dollar firmed slightly to C$1.4050 per US dollar, or 71.17 US cents. The next rate decision is December 9.