The Bank of Canada (BoC) raised its overnight rate by 25 basis points to 2.50% on Oct. 28. It is the first rate hike since mid-2023 and ends a string of seven straight holds at 2.25%. The decision follows a September inflation reading of 3.1%, an unemployment rate of 6.5%, tariff uncertainly, and the first Fed hike in more than three years. 

"[The] Governing Council decided to increase the policy rate to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services,” Governor Tiff Macklem said in the BoC's opening statement. 

In the months leading to today’s decision, consensus expectations for a hike on Oct. 28 were somewhat divided. That may have changed after Governor Tiff Macklem told reporters at the International Monetary Fund meetings in Bangkok that the Bank was questioning whether inflation would return to target on its own, “or are we going to have to raise interest rates to influence the path?” 

Macklem’s comments signalled that policymakers had become more concerned about inflation and were prepared to raise rates if needed. 

Behind the 25 basis-point hike are several pressures building for months: 

• High gasoline and diesel prices have kept inflation above 2.5% since Apr. 2026
• Raw material prices remain elevated since Mar. 2026
• Businesses expect to pass increasing costs on to customers
• The U.S. central bank resumed raising rates in September
• On-off risks of tariff pressures
• Rising bond yields that were already driving mortgage rates higher

High energy prices are driving inflation

The case for a rate hike starts with energy. 

Canada's consumer price index rose 3.1% in September from a year earlier, driven by higher gasoline prices, Statistics Canada notes. Headline inflation has been above the top of the Bank's 1% to 3% target range for eight of the past nine months, peaking at 3.2% in May. The Bank's core measures, which exclude food and energy, slowed to 1.8% from 1.9%. 

“The overwhelming majority of the 1%-point increase in headline inflation above the Bank of Canada's 2% target is being driven by higher energy prices,” says Ali Jaffery, chief economist at KPMG Canada. 

West Texas Intermediate crude has averaged about US$95 a barrel since the Bank's September decision, roughly 54% higher than a year earlier, RBC Economics notes. 

Read more: Bank of Canada holds rates at 2.25% amidst tariff uncertainty, persistent energy inflation

Diesel is becoming a broader cost pressure

Diesel prices have risen even more sharply. The national average retail diesel price reached $2.66 a litre in the week ended Oct. 27, up from $1.54 a year earlier, according to Natural Resources Canada data. 

Because diesel fuels most freight transportation, farm equipment, and much of the movement of goods across the economy, higher prices are already working their way into shipping costs. Fuel surcharges on truck shipments have climbed to about 45% of the base freight charge, up from 25% earlier this year, according to Farm Credit Canada. 

The increase is also showing up in producer costs. Statistics Canada reported that producer prices for diesel fuel rose 18.4% in September and were up 106.1% from a year earlier. The Raw Materials Price Index increased 27.0% year over year, and 13.8% excluding crude oil prices. Prices for chemicals, plastic resins, and fertilizers also increased during the month. 

Not all economists had expected those higher energy costs to have yet spread meaningfully through the broader economy. 

“The direct impact is obvious through gasoline prices,” says Don Drummond, former senior vice-president and chief economist at TD. In his view, “the oil price effect has not yet materially driven up other prices”. 

That said, the Bank's concern is whether persistent energy inflation eventually feeds into a wider range of goods and services. 

In its third-quarter Business Outlook Survey, released Oct. 19, roughly half of firms say they plan to pass some or all of their cost increases tied to the war in the Middle East and tariffs on to customers, a larger share than last quarter. Firms facing bigger-than-normal cost increases, especially consumer-facing ones, say they plan to keep passing costs downstream over the next 12 months, partly to recover margins squeezed by earlier increases.

Firms are also more uncertain about when inflation will return to target. In the Bank’s monthly Business Leaders’ Pulse, firms surveyed in September expect inflation of 3.7% one year ahead, up from 3.2% in August, and to soften to 3.1% two years ahead, up from 2.8%. Almost one-quarter of firms, a larger share than last quarter, say it is too hard to determine when inflation will return to 2%.

The Fed and bond markets led the move higher

The Bank of Canada is not the only central bank worried about inflation. In September, the U.S. Federal Reserve delivered its first rate hike since 2023 and said it may not be finished yet. RBC Economics expects the Fed to deliver two additional quarter-point increases by the end of the first quarter of 2027. 

While the Fed's path indirectly impacts exchange rates, the more immediate story for Canadian borrowers has been in bond markets. 

Five-year Government of Canada bond yields have climbed more than 40 basis points over the past three months as investors reassess the outlook for inflation and interest rates, RBC Economics notes. Because many Canadian households and businesses borrow at fixed rates, those rising yields were already tightening financial conditions before the Bank of Canada acted. 

“Too much focus is placed on the Bank of Canada and short-term rates. The action of late is in bond markets,” Drummond says. “Bond yields are rising globally and Canada has not been immune. These forces will likely continue with global inflation and indebtedness.” 

With 10-year Government of Canada bond yields nearing 4%, financial conditions had already become significantly tighter, Drummond says. 

Fixed mortgage rates have followed suit. Since early September, rates have risen by about one percentage point into the high-4% and low-5% range, with little indication they will fall anytime soon, according to Victor Tran, mortgage and real estate expert at Rates.ca. 

Learn more: Ask the mortgage expert: What a U.S. Fed rate hike could imply for Canadian mortgage rates

What the hike means for mortgage borrowers

Variable-rate borrowers feel the impact of today's decision first, and Tran expects more hikes to follow. 

“This hike will immediately put upward pressure on variable rate mortgages, bringing them a step closer to fixed rates,” Tran says. For every 25-basis-point increase, variable-rate borrowers can expect to pay roughly $15 more per month for every $100,000 of mortgage, he says.

“Now that the Bank of Canada has initiated a tightening cycle, variable rates are likely to rise substantially in the coming months. Homeowners should expect upward pressure on mortgage rates to continue for the next 12 to 18 months," Tran adds. 

Rates.ca quoter data shows a shift toward fixed rates in September. Of mortgage quotes completed on Rates.ca that month, 76% were for fixed rates and 24% for variable, compared with a 29% variable share in August. Over the past three months, about one in four quotes has been for a variable rate.

Rates.ca mortgage quote breakdown by rate type, July to September 2026
 

Source: Rates.ca quoter data, July to September 2026. Figures show the share of completed mortgage quotes by rate type.

On fixed rates, the two economists Rates.ca spoke with disagree about the next six months. Drummond expects 5-year fixed rates to rise another 50 basis points over that period as global bond yields keep climbing. Jaffery expects fixed rates to stay roughly where they are through the end of 2026, because markets have already priced in more tightening. 

Looking into 2027, Jaffery expects long-term bond yields to edge down a little if inflation and energy prices recede and long-term U.S. bond issuance slows. “But the cost of capital will remain elevated compared to what it was in 2025 and the start of 2026 as global and U.S. growth remains strong,” he says. 

Tran's advice to anyone entering the market is to budget for higher rates. “Expect mortgage rates to be at least one percentage point higher at this time next year,” he says. Those renewing or planning to buy in the coming months should lock in a rate hold now as protection against further increases, he says. 

The maximum rate hold is 120 days, or four months. He also recommends working through several scenarios with a mortgage broker to understand available options and price points. 

For borrowers coming up for renewal, Drummond sees pressure building: “Challenges continue to mount. Higher rates on mortgages. Softer housing prices." So far, renewals for people coming off very low rates five years ago have gone smoothly, with low arrears and defaults, he notes. 

“But households are hurting and this is showing up in squeezed budgets elsewhere such as shifting to low-cost grocery outlets and eating out less often. This can be expected to intensify.” 

Housing: a factor, but not the focus

Housing is on the Bank's radar, but neither economist Rates.ca spoke with thinks it drove the Bank’s hawkish move. 

“It's part of the discussion because housing is an interest-sensitive sector, but it's not the focus,” Jaffery says. Housing-related parts of the inflation basket are currently lowering price pressures rather than raising them, he notes, with rent inflation and home prices subdued as population growth continues to slow. 

“Housing is a downside risk to inflation rather than an upside, but it's a smaller downside risk than energy is to the upside,” says Jaffery. 

Drummond says housing played “little” part in the Oct. 28 BoC decision. The market keeps softening but is not collapsing, in his view, and the Bank is likely happy to see affordability improve, even if buying a home remains difficult. 

For buyers and sellers, the hike arrives at a seasonally slow point. The winter is traditionally quiet for the housing market, and with a tightening cycle now underway, housing prices are likely to continue to soften, Tran says. For would-be homeowners, lower home prices and expected higher mortgage rates may affect buying power, he says. 

What to expect for borrowing rates in 2027

“There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully,” the Bank says in today's press release, opening the door to the start of a hiking cycle aligned with further global developments.

Most forecasters expect the Bank to tighten financial conditions further. 

Jaffery, who changed his forecast to an October hike after Macklem's comments, says he is weighing the possibility of back-to-back hikes given the Bank's hawkish stance. He is watching three things that could trigger further increases: 

• Energy prices staying high
• Higher core inflation
• Growing global concern about central bank credibility and inflation

Drummond, who did not expect a hike, says the conditions for raising rates further would be firmer economic growth and core inflation moving above 2%. 

Scotiabank Economics was ahead of most of the market in calling for a hike as early as Apr. 2026. Its Oct. 13 forecast, published before Macklem’s IMF comments, already had the policy rate at 2.50% by the end of 2026 and 3.25% by the end of 2027. In a Sept. 29 note, the bank said the economy was stronger than expected and the Bank of Canada needed to start raising rates. 

At the BoC's September meeting, CIBC had forecast a hold for Oct. 28 and a 25 basis-point hike in Q2 2027. It has now pulled the first hike forward to October. Avery Shenfeld, CIBC’s chief economist, wrote that the bigger question is whether any hikes will be needed in the coming year, since a deal that lowers oil prices or worse trade frictions could change the picture. 

RBC's base case already assumed 100 basis points of hikes in 2027. If the economy keeps improving it says it will be watching the Bank's communication to ascertain how many and when more hikes could be down the pipeline. Jaffery notes that markets are pricing in more hikes than he expects.

Here's what major Canadian banks predict for the next quarter to Q2 2027
 

Legend: ▼ Rate cut | ■ Hold | ▲ Rate hike

Source: BMO, CIBC, TD, RBC, Scotiabank, and National Bank economics and rate outlook reports, as of October 27, 2026. Forecasts subject to change.