Macklem’s Bank of Canada delivers its first hike since July 2023 and warns more may be needed

The Bank of Canada increased its target for the overnight rate by 25 basis points to 2.5% on Wednesday, with the Bank Rate at 2.75%¹. It was the first hike since July 2023⁹, ending a run of more than three years without an increase⁸.

The bank said it acted to ward off upside inflation risks posed by higher energy prices, and that it may need to raise borrowing costs further². It said further increases may be needed to fight inflation¹⁶. Governor Tiff Macklem said an increase in the policy rate was needed to reduce the risk from elevated inflation³.

The move followed persistently high oil prices and stronger-than-expected economic growth¹². Ahead of the meeting, a hike was about 80% priced by markets¹⁰, although some economists had not been fully sure of the outcome¹⁷.

Why it matters to investors

The bank raised its growth outlook⁷. It now projects GDP growth of 1% in 2026 and 2% in both 2027 and 2028, slightly higher than it previously anticipated⁷. The 2026 forecast is 0.3 percentage points higher than in the July report⁶, up from 0.7%¹⁴.

The labour market gives a weaker read¹⁵. The unemployment rate has held near 6.5%, and US tariffs are weighing on activity¹⁵. Bank surveys show businesses’ sales expectations improved in the third quarter, but more recent results point to renewed weakness⁵. The bank cited the risk that global upheaval poses to inflation¹⁵.

The decision places Canada alongside other central banks tightening into the energy shock⁴. The bank noted that the European Central Bank has raised its policy rates by 50 basis points since June, reflecting concerns about the energy shock⁴. For lenders, the hike puts Canadian bank stocks in focus, and its effects will not be spread evenly across them¹⁹.

What to watch

The first marker is whether the bank follows through. One assessment after the decision said the bank is likely to hike again¹⁰, and another expects more increases to come¹².

The second is the currency. The euro edged higher against the Canadian dollar after the decision landed in line with expectations, with EUR/CAD trading around 1.5640¹⁸. Investors now turn to Thursday’s European Central Bank decision, with another rate hike there possible in December¹⁸.

The third is energy. The bank tied its decision to higher energy prices² and to persistently high oil prices¹². Macklem was expected to speak on the hike later in the morning¹⁷.