For the first time since 2023 the Bank of Canada has raised its benchmark rate. After a quarter point hike the central bank’s policy rate now stands at 2.5 per cent.

The increase is to combat inflation. The BOC prefers to have inflation at two percent and in his report Bank of Canada Governor Tiff Macklem says the consumer price index (CPI), or inflation, has stayed close to 3 per cent over the past six months, which he says largely reflects higher gasoline prices. Inflation is estimated to rise to about 3-and-a-half per cent by the end of the year which is also about 1 percentage point higher than anticipated in the July Report.

Excluding gasoline, inflation was 2.2 per cent in September, and measures of core inflation remain close to 2 per cent. But the BOC says cost pressures are building, with high fuel prices raising the costs of production and transportation. Imported industrial and electronics input prices have also increased. And Macklem says while businesses have mostly absorbed higher input costs so far, Bank surveys suggest cost pass-through will increase over the next year.

It also notes conflict in the Middle East is now in its eighth month and there is no clear path to resolution. The combination of higher-for-longer energy prices with increased costs passed to the consumer contributes to their forecast inflation will persist.

Owing to new US tariffs, growth is expected to slow in the fourth quarter of 2026, before picking up again in 2027. The Canadian economy is expected to grow 1 per cent in 2026, and 2 per cent in 2027 and 2028. This is a somewhat stronger overall growth projection than the July Report. The central bank says this forecast is still subject to considerable uncertainty, particularly regarding Canada-US trade relations.