Bank of Canada raises key rate to 2.5%, first hike since 2023

In short

• The Bank of Canada raised its benchmark rate by 25 basis points to 2.5% on 28 October 2026.
• It was the first increase since July 2023, matching expectations among many economists.
• The Bank said inflation could hit 3.5% by year end and signalled more hikes may follow.
• Mortgage borrowers with variable rates face a likely 25-basis-point rise in their payments.

On 28 October 2026, the Bank of Canada raised its benchmark interest rate by 25 basis points, or 0.25 percentage points, to 2.5% from 2.25%, as set out in its official statement. The increase was the central bank's first since July 2023 and had been widely expected. Pre-meeting surveys cited by Investing.com Australia and Yahoo pointed to a quarter-point move, and the final decision matched them. InvestIn.News found that the decision was driven by the need to stop persistent inflation from taking hold. Inflation has been around 3% since April, inflation excluding petrol was 2.2% in September, and the Bank expects about 3.5% by year end. It warned that high energy prices could spill into broader price growth. The central bank sets its overnight rate target to influence borrowing costs and keep inflation near 2%.

Why inflation forced the Bank's hand

Inflation in Canada has been around 3% since April, and the central bank expects it to rise to about 3.5% by the end of the year, according to its October statement. Excluding petrol, inflation was 2.2% in September, but high energy prices are raising production and transport costs. The Bank said businesses are likely to pass more of those costs on to consumers over the next year. It also revised up its global growth forecast slightly to 3.1% for 2026, and said global financial conditions have tightened since July.

Growth picked up in Canada through the middle of the year, with GDP expanding at an annualised 3.3% in the second quarter and about 2% in the third quarter, according to the Bank. Consumer spending has been solid and business investment rebounded. The Bank expects the Canadian economy to grow 1% in 2026 and 2% in 2027 and 2028, a somewhat stronger outlook than its July report.

What the hike means for mortgage borrowers

Variable mortgage rates are closely tied to the central bank's overnight rate target, so lenders' prime rates are likely to rise by 25 basis points. MoneySense reported that the lowest five-year variable mortgage rate would probably increase from 3.45% to 3.70%. A homeowner with a 10% down payment on a $666,538 home and a five-year variable rate of 3.45% currently pays about $3,072 a month, according to Ratehub.ca's mortgage calculator cited by MoneySense. Fixed mortgage rates are not directly affected, and the best five-year fixed rate on 28 October was 4.34%.

Economists split on more hikes

Economists at CIBC, Desjardins and Capital Economics said at least one more rate increase is likely, according to the Financial Post. Investors cut their bets on a December hike to 55% from 100% the day before, based on market swap data cited by the Financial Post. CIBC's Andrew Grantham said the Bank of Canada hiked to guard against energy prices becoming a widespread inflation problem, and CIBC expects a January increase to 2.75%. Desjardins called the move a tough, forward-looking decision and also expects a final January hike.

Users on X slam the decision

Criticism on X was blunt. Unwoke Media Inc (@UnwokeMediaInc) said people had to pay more because Mark Carney keeps borrowing money and causing inflation. Ashlee (@CdnMama3) said the hike would ensure a recession and enrich banks while Canadians go broke. Rufus (@Rufusdufus911) said it made survival harder. An account posting as footprinthunter said Bank of Canada Governor Tiff Macklem had got it wrong every time.

Will the Bank raise again in December?

The Bank signalled that further increases to the policy rate may be necessary, though with uncertainty elevated it will move cautiously and judge each meeting on its own merits. Its next rate decision is scheduled for 9 December 2026, with the following Monetary Policy Report due on 27 January 2027. Desjardins still anticipates a final hike from the Bank, the timing of which will hinge on incoming data.

Timeline

• 28 Oct 2026: Bank of Canada raises policy rate to 2.5%
• 9 Dec 2026: Next scheduled overnight rate announcement
• 27 Jan 2027: Next Monetary Policy Report released

Questions readers ask

Why did the Bank of Canada raise interest rates in October 2026?

The central bank raised its benchmark rate by 25 basis points to 2.5% on 28 October 2026 to stop high energy prices from spreading into broader inflation. The Bank said inflation has been around 3% since April and could reach 3.5% by year end.

How will the Bank of Canada rate hike affect mortgage holders?

Variable mortgage rates are tied to the central bank's target, so lenders' prime rates are likely to rise by 25 basis points. MoneySense reported the lowest five-year variable rate could move from 3.45% to 3.70%.

Will the Bank of Canada raise rates again in December 2026?

Governor Tiff Macklem said there could be a need to raise the policy rate further, but decisions would be taken one meeting at a time. Economists are split: CIBC and Desjardins expect a January hike, while market pricing about December slipped to 55%.

Our view

At InvestIn.News, we think the Bank of Canada's decision to raise its benchmark rate is a good step to handle persistent inflation. Inflation has been around 3% since April and is expected to reach 3.5% by year end, driven by high energy prices. The Bank says businesses are likely to pass more costs on to consumers, and households and businesses have already raised their near-term inflation expectations. Acting now, rather than allowing those expectations to drift, helps protect the purchasing power of ordinary Canadians.

We recognise the trade-off: variable-rate borrowers will pay more, and the move drew angry reactions on X. But the Bank of Canada has signalled it will proceed carefully, one meeting at a time, and the Canadian economy has shown resilience with GDP growth of 3.3% in the second quarter.

The 9 December decision will show whether the Bank judges one hike enough to keep inflation anchored, or whether a further move is needed.

— Ishu Aggarwal

Follow the latest as it happens on Macro NewsFeeds.

Ishu Aggarwal

What to watch: The Bank of Canada will announce its next overnight rate target on 9 December 2026, and its next Monetary Policy Report is due 27 January 2027.