The Bank of Canada raised its benchmark interest rate on Wednesday, its first increase in more than three years, warning that the ongoing conflict in the Middle East and persistently high energy prices could make further hikes necessary to control inflation.
The Bank increased its target for the overnight rate by 25 basis points to 2.5%.
The increase, the first since July 2023, comes as the Middle East conflict enters its eighth month with no clear resolution in sight, the Bank said in its accompanying statement. Elevated oil prices have pushed Canadian inflation higher and are increasingly raising costs throughout the economy.
"The combination of higher-for-longer energy prices and increased pass-through adds to the persistence of inflation in the projection," the statement said. Canadian inflation has remained around 3% since April and is expected to climb to approximately 3.5% by the end of 2026.
The Bank now expects inflation to average 3% in 2027, a full percentage point above its July forecast, before returning to its 2% target around the middle of 2028.
Although inflation excluding gasoline was just 2.2% in September, higher fuel costs are increasingly affecting production and transportation expenses. Businesses have largely absorbed those additional costs so far, but surveys suggest more increases will be passed along to consumers over the coming year, the Bank said.
While additional interest rate increases may be necessary to prevent higher energy costs from spreading more broadly throughout the economy, the Bank said it will proceed cautiously given ongoing uncertainty.
The Bank's next scheduled interest rate announcement is Dec. 9.
