Bank of Canada Rate Decision — 28 October

Decision

• The Bank of Canada raised its policy rate by 25 basis points to 2.50%.
• The bank rate is now 2.75%, and the deposit rate is 2.45%.

Background

• Inflation: CPI is running at around 3% and is expected to rise to about 3.5% by year-end. Average inflation in 2027 is projected at 3%, one percentage point higher than in the July forecast. Prolonged conflict in the Middle East, higher oil prices and the pass-through of higher costs are contributing factors.
• Growth: Growth is forecast at 1% in 2026 and 2% in 2027–28, a slight upward revision from July. However, new US tariffs are expected to slow activity in the fourth quarter.
• Labour market: Unemployment is around 6.5%, indicating that some slack remains in the economy.

Guidance

• The Bank left the door open to further rate increases, while stressing that it would “proceed cautiously.”
• The next policy decision is scheduled for 9 December. The next Monetary Policy Report is due on 27 January 2027.

Canadian Dollar Reaction: No Clear Direction

Supportive factors: the rate hike, the possibility of further increases, higher oil prices and an upward revision to the growth outlook.

Negative factors: the Bank’s cautious stance, which may limit expectations for consecutive hikes; concerns about a tariff-driven slowdown; remaining slack in the economy; and a stronger US dollar.

With the market waiting for a fresh catalyst, the Canadian dollar may remain range-bound.

What to Watch Next

• Canadian CPI: whether core inflation turns higher from around 2%
• Oil prices and developments in the Middle East
• The direction of US tariffs
• US economic data and the Federal Reserve

Scenarios

• Core CPI comes in above expectations: expectations for further rate hikes could strengthen, supporting the Canadian dollar.
• Tariffs weaken the economy: expectations that the rate-hiking cycle has ended could increase, weighing on the Canadian dollar.