Central bank moves rates higher as inflation fears rise
The Bank of Canada has hiked its benchmark rate for the first time since July 2023 amid rising fears about the national inflation outlook.
The central bank said on Wednesday morning it was raising that trendsetting interest rate by 25 basis points to a level of 2.50%, ending its long wait-and-see approach on the rate question.
Major Canadian lenders are expected to increase their prime rates following the decision. Variable mortgage rates, as well as home equity lines of credit (HELOCs), typically rise and fall in tandem with Bank of Canada moves.
Odds of a rate jump by the BoC had risen in recent weeks as fuel costs continue to surge, mainly because of the ongoing US-Iran war.
The overall consumer price index (CPI) climbed only modestly month over month in September (to 3.1%, up by 0.1%), but the Bank’s move will be viewed as a pre-emptive bid to stave off the threat of higher energy costs spilling into other sectors.
The hike is the Bank’s first step off the sidelines in 2026. It’s held rates steady through the year to date as it weighs a sluggish national economy against growing concerns on the inflation front.
While the Bank kept rate hikes on ice until today, fixed mortgage rates rose steadily in September because of the upward trajectory of five-year Government of Canada bond yields.
BoC governor Tiff Macklem will face the media at about 10:30 a.m. ET this morning and could give some indication of whether further rate hikes are likely in the months ahead.
What’s next for the BoC?
For now, it looks unlikely that the central bank will embark on a series of steep hikes similar to the last time it started raising rates.
In March 2022, the BoC bumped rates 25 basis points higher after nearly two years at rock-bottom lows of 0.25% – and that was a sign of things to come, with its policy rate spiking by a further 450 basis points in the 16 months following that move.
This time around, the weakness of the Canadian economy and the continuing negative impact of trade tensions with the US mean lenders and financial markets are pricing in only mild further increases by the Bank.
What the decision means for the housing market
For the housing market, it remains to be seen whether today’s decision will push potential homebuyers onto the sidelines.
Housing and mortgage market watchers had been increasingly anticipating some rate increase by the BoC in recent weeks – but even the expectation of hikes hadn’t compelled many would-be buyers to rush into the market to secure mortgage rates at their current level.
The Bank has one further rate decision in store for 2026, with that announcement set for December 9.
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