The Bank of Canada raised its overnight rate by 25 basis points to 2.50% on October 28, its first increase since July 2023. Two days later, Statistics Canada reported that August real GDP was essentially flat, below its own preliminary estimate of 0.2% growth.
The hike was widely expected, according to Desjardins. The surprise was the inflation forecast: the Monetary Policy Report projects headline inflation of about 3.4% by the end of 2026, up from 2.4% in the July report, and at or above 3% through much of 2027. Governor Tiff Macklem said there could be a need to raise the policy rate further, but given the uncertainties the Bank will proceed carefully.
A Hike Into a Stalling Economy
Real GDP grew at a 3.3% annualized pace in the second quarter, above the 2.5% forecast in the July report. The September flash estimate points to a further 0.1% decline, and bank economists quoted by MPA put third-quarter growth tracking near 1.3% annualized, against the Bank forecast of about 2.0%. The Bank projects fourth-quarter growth of about 0.8%.
Andrew Grantham of CIBC Economics said all of the third-quarter growth came from the strong handoff from the second quarter, so the economy stagnated during the period. Marc Ercolao of TD Economics said August may cast more doubt around the durability of the recovery heading into 2027. Abbey Xu of RBC Economics read the composition as somewhat better than the headline, citing gains in retail and engineering construction.
Inflation is the other side of the ledger. Headline CPI rose 3.1% in September from a year earlier, while inflation excluding gasoline was 2.2% and core measures remained near 2%, according to Statistics Canada and the Bank. That gap is the case for the hike: energy costs could spread beyond fuel prices, which the Bank said it will watch.
The Rate Path in Context
The policy rate fell 275 basis points from 5.00% to 2.25% between June 2024 and October 2025, held for seven consecutive decisions, and has now reversed 25 basis points of that easing.
Overnight target after each scheduled decision from April 2, 2024 to October 28, 2026; holds appear as flat segments. The Bank held on April 16, June 4 and July 30, 2025 before cutting on September 17 and October 29.
The Bank Rate rose to 2.75% and the deposit rate to 2.45%, and the Canadian dollar edged higher to C$1.4050 per US dollar, Reuters reported. Before the decision, FXStreet reported that markets priced four increases by September 2027. Desjardins expects one more hike, with timing dependent on data.
What Decides December 9
The next decision is December 9, and the next Monetary Policy Report is January 27, 2027. Between now and then, the October and November employment reports will test the labour market, which InvestingLive reported shed jobs in August and September, with the unemployment rate back to where it started 2026.
For variable-rate borrowers the arithmetic is direct: a quarter-point increase adds $250 a year in interest for every $100,000 borrowed. Fixed-rate renewals follow bond yields more than the policy rate, so the path of the five-year yield matters as much as the December decision. A flat economy argues for patience; a 3.4% inflation forecast argues against it. The data between now and December 9 will decide which argument carries the Governing Council.