Bank of Canada Raises Rate to 2.5%, Flags More Hikes — SkimNews
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- Bank of Canada lifted its policy rate by a quarter percentage point to 2.5% on Wednesday, the first increase in three years after holding the benchmark rate steady since last October.
- Tiff Macklem said there could be a need to raise the policy rate further, but the bank will proceed carefully, deciding one meeting at a time; he said businesses have mostly absorbed higher energy costs so far, and bank surveys point to cost pass-through increasing over the next year.
- Monetary Policy Report — the central bank's quarterly forecast now has inflation staying above 3% through 2027 before settling back around the 2% target by the middle of 2028, and cites the U.S. AI build-out as adding pressure on electronics equipment prices.
- Gasoline prices — up more than 30% over the past year — account for most of Canada's roughly 3% headline inflation since April, while core inflation remains close to 2%.
- Canadian GDP is now forecast to grow at an annualized 3.3% in the second quarter of 2026, up from the bank's previous 2.5% estimate, before slowing to 2% in the third quarter and 0.8% in the fourth as U.S. tariffs begin to bite; 2027 and 2028 are forecast at 2% each, up from 1.8%.
- Business investment is expected to grow about 4% on average in 2027 and 2028, boosted by the federal government's productivity "mega deduction" that lets companies write off most capital costs up front, plus energy-sector investment, AI adoption and projects run by the Major Projects Office.
- Variable-rate mortgages are the most direct casualty of the quarter-point move, which raises borrowing costs across the economy; financial markets expect the start of a moderate tightening cycle with several more hikes over the next year.
Why it matters: Variable-rate mortgage holders face higher borrowing costs after the 0.25-point move to 2.5%, and financial markets expect several more hikes over the next year. With core inflation near 2% and headline near 3% driven by gasoline, the BoC is tightening against a pass-through into broader prices that it says has not yet happened.
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