The Bank of Canada raised its policy rate target by 25bps to 2.5% at the conclusion of its Oct 2026 meeting on Wednesday.
In the post-meeting statement, the Canadian central bank based its decision to hike on the fact that its surveys “suggest cost pass-through will increase over the next year” and that “[t]he combination of higher-for-longer energy prices and increased pass-through adds to the persistence of inflation in the projection.”
The Bank also revealed its bias toward further rate hikes in the upcoming meetings, saying “[t]here could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully.”
In the press conference opening statement, Governor Tiff Macklem stated that not only the upside risk for future inflation is “substantially higher” but also the Canadian economy is “showing resilience” so the Bank thought an increase in the rate “is needed to reduce the risk that elevated energy prices could spill over” to generate higher inflation in general. (Emphasis ours)
So, the rate hike is a precautionary move. In the press conference, when asked how a quarter percentage point increase in the policy rate can help tackle the inflation problem, Macklem went on to frame the move as leaning against the risk of a widespread spillover from the energy price surge.
His argument is that even after the rate hike, BoC’s monetary policy stance is “still low enough that it’s not restraining growth” but can help mitigate the pass-through of higher business costs and help bring inflation back to its target more quickly. So the move is merely a reduction in the scope of monetary accommodation. (Emphasis ours)
Macklem added that the higher interest rate is “not going to [make businesses] feel good immediately, but that’s how you get inflation back down” and will make Canadians and Canadian businesses “feel good” in the longer run.
