The Bank of Canada raised its overnight rate to 2.5% on Oct. 28 with CPI-trim at 1.8% and CPI-median at 1.9%, both below the 2% target, and with employment down a net 41,200 jobs so far in 2026. The decision rested on a forecast, not on the data in hand.
Total CPI was 3.1% in September, 1.3 points above CPI-trim, the widest gap with headline above core in the 18-month record. Gasoline was up 27.8% from a year earlier, shelter rose 1.8%, and core excluding food and energy held at 2.1%, according to Statistics Canada figures reported by Yahoo Finance Canada.
The Pass-Through Bet Behind the Hike
The Bank argued that the energy shock will not stay in energy. In its Oct. 28 opening statement, the Bank said Middle East conflict has lifted oil prices, that gasoline, diesel and heating oil sit well above July levels, and that higher energy costs are expected to pass through to broader prices over the next year. It also judged the economy more resilient than expected: GDP grew 3.3% in the second quarter, and recent indicators point to about 2% in the third.
The projection is what carried the vote. The Bank expects CPI near 3.5% by year-end, at or above 3% through much of 2027, and back near 2% by mid-2028. The case for holding was real, and the statement named it: CPI excluding gasoline was 2.2% and core inflation sat near 2%.
Total CPI has run above both core measures every month since March, while CPI-trim and CPI-median have fallen from near 3% to under 2%. That gap is what the Bank is trying to prevent from closing upward.
CPI-trim and CPI-median are the Bank of Canada preferred core measures, shown seasonally adjusted. The shaded band marks the seven consecutive months, March to September 2026, in which total CPI exceeded both.
A Labour Market Moving the Other Way
The jobs data points in the opposite direction. Statistics Canada reported on Oct. 9 that the economy lost a net 68,300 jobs in September against a consensus forecast of a 9,200 gain, after a 41,700 loss in August. The unemployment rate rose to 6.5% from 6.4%. The year-to-date change is a net loss of 41,200 jobs, compared with a gain of 211,300 over the same period of 2025.
The composition matters. Manufacturing, which is partly exposed to U.S. tariffs, lost 12,700 jobs, and public sector employment fell sharply in health care, social assistance and education. The participation rate fell 0.2 points to 64.8%, its lowest in 29 years outside the pandemic. Average hourly wages for permanent employees rose 2.3% from a year earlier, up from 2.0% in August.
Royce Mendes of Desjardins said after the report that the weaker labour market made a hold likely, with energy prices a possible reason to tighten soon. The Bank acknowledged that a broad set of indicators still shows excess supply and that the unemployment rate has stayed around 6.5% for several months. It chose to act on the price side.
The Transmission to Borrowers and the December Test
The mechanism runs through prime and bond yields. Prime rises from 4.45% to 4.70% at the large banks. On a $500,000 variable-rate mortgage at prime minus 0.50% with a 25-year amortization, the monthly payment rises from about $2,617 to $2,685, roughly $816 a year. Fixed rates follow bond yields, and two-year yields rose more than 0.22 percentage points between the September and October decisions. Doug Porter, chief economist at BMO, said the situation had moved beyond the Bank comfort zone.
Markets price four quarter-point hikes by the end of 2027, including the Oct. 28 move, which would take the policy rate to 3.25%. In a Reuters poll of 29 economists taken Oct. 21 to 23, 16 expected another hike before the end of March 2027. The Federal Reserve held at 3.75% to 4.00% on Oct. 28 in a 10-2 vote, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favour of a hike.
The Nov. 4 move in oil bears directly on the Bank thesis. WTI settled down 8.29% at $88.12 and Brent fell 8.67% to $94.62 after Vice President JD Vance blamed the Iran war for Republican midterm losses. The Bank statement assumed prices would remain high for longer. One session does not settle that assumption, but a sustained decline would weaken the pass-through case before the Dec. 9 decision, with two CPI releases and two jobs reports still to arrive.