By : Ramona Singh (Associate Editor – Y Media)
Governor warns more hikes may follow as energy costs spread through the economy
OTTAWA — The Bank of Canada raised its key interest rate Wednesday for the first time in more than three years, warning that high energy prices driven by the war in the Middle East are beginning to spread through the economy. The central bank lifted its policy rate by a quarter of a percentage point to 2.5 per cent, ending a pause of nearly a year that followed a long series of cuts. Throughout 2026, the bank has watched to see whether higher oil prices, with crude hovering around US$100 a barrel, would stay at the gas pump or filter into the wider basket of goods Canadians buy. Governor Tiff Macklem said the evidence now points to the latter, as businesses that had been absorbing higher energy costs grow more likely to pass them on to customers. Inflation rose to 3.1 per cent in September, driven largely by gasoline prices. “With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate is needed,” Macklem said in prepared remarks, adding that the move aims to reduce the risk that elevated energy prices become generalized inflation.
In its updated Monetary Policy Report, the bank now forecasts inflation will reach 3.5 per cent by the end of this year and average 3 per cent in 2027, about a full percentage point above its July projection. It does not expect inflation to return to its 2 per cent target until mid-2028. Food prices are a particular concern. The bank expects food inflation to average about 4 per cent next year, roughly half a percentage point higher than this year, as energy costs work their way through the supply chain. Tariffs are adding to the pressure. The bank said tariffs and the past weakness of the Canadian dollar are pushing up import costs, and it also pointed to rising prices for some industrial inputs and equipment used to build artificial intelligence systems. Macklem left the door open to further hikes, saying there could be a need to raise the policy rate again, but that given the uncertainty the bank will proceed carefully and take its decisions one meeting at a time.
The bank acknowledged it considered holding rates steady, because the rise in inflation so far has been concentrated in energy. Some economists believe the bank’s concerns may be overstated. CIBC senior economist Andrew Grantham said he expects the bank to pause at its final decision of the year on Dec. 9 before delivering another quarter-point hike in January. He added that CIBC does not expect the bank’s preferred measures of core inflation to accelerate as much as the central bank fears.
The bank cautioned that its projections remain subject to considerable uncertainty, particularly around the Middle East conflict and U.S. trade policy. For Canadians with variable-rate mortgages, the hike means higher payments or higher interest costs. Homeowners renewing fixed-rate mortgages this winter may face higher rates than they had hoped, and lines of credit and many business loans will also become more expensive. The bank expects the housing market to feel the effects. It said affordability constraints, slowing population growth and rising borrowing costs, including Wednesday’s increase, will weigh on home buying and construction in the years ahead. Some good news in the forecast. Higher energy prices also offer a boost to parts of Canada’s economy. Rising oil prices, combined with supportive government spending, are expected to drive business investment.
The bank expects real GDP growth of about 1 per cent in 2026, rising to 2 per cent in both 2027 and 2028. While recent tariff escalation between Canada and the United States is expected to slow growth in the fourth quarter, officials said the economy has proven more resilient than first expected. Attention now shifts to Washington, where U.S. Federal Reserve Chair Kevin Warsh is scheduled to announce the Fed’s latest rate decision Wednesday afternoon. The Fed is widely expected to hold rates steady. For years, the question for Canadian families was when rates would finally come down. On Wednesday, the direction changed. For the homeowner renewing this winter, the family carrying a line of credit and the young couple saving for a first home, borrowing just got more expensive, and the governor is signalling it may not stop here. The Bank of Canada is betting that acting now will prevent a bigger inflation problem later. But the number that will matter most at the kitchen table is the forecast for food prices next year. That is where Canadians will feel this.
