Bank of Canada Raises Policy Rate to 2.50%

Bank of Canada Raises Its Rate to 2.50% in First Increase Since 2023

The Bank of Canada raised its policy rate by a quarter of a percentage point to 2.50% on October 28, 2026, ending a 7-hold streak and delivering its first increase since July 2023.

The move had been building since mid-October. Oil was trading far above what the Bank had assumed in its July forecast, headline inflation had climbed back above the top of the Bank’s target range, and Governor Tiff Macklem had used the International Monetary Fund (IMF) meetings in Bangkok to warn that the Bank would likely raise its inflation outlook. He told reporters on October 17 that the question was whether inflation was “likely to come back down toward our target on its own.” Within days, overnight swaps had moved from pricing in a roughly 35% chance of an October hike to nearly 90%, according to Bloomberg data, and 19 of 34 economists polled by Reuters expected one.

The Bank moved despite the economy losing 110,000 jobs in 2 months and measures of core inflation remaining close to 2%. For anyone with a variable mortgage or a home equity line of credit, lenders set the rate based on the prime rate. Existing fixed mortgages are unaffected, and for anyone renewing or shopping, the 5-year Government of Canada (GoC) bond yield still matters more than the Bank’s move.

What the Bank of Canada Decided

The decision raised the target for the overnight rate, the Bank’s policy rate, to 2.50% from 2.25%, where it had been since the October 2025 cut. The Bank Rate rises to 2.75% and the deposit rate to 2.45%. Governing Council said it raised the policy rate “to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services.” Lenders usually raise prime by the same amount within a day or two, which would take it to 4.70% from 4.45%.

The decision came with the Bank’s Monetary Policy Report, its first full forecast update since July. The July report assumed Brent crude would average about US$75 a barrel in the third quarter and expected inflation to ease to around 2.5% in the second half of 2026. By mid-October, Brent was trading near US$101 before climbing to a six-month high of US$103, and headline inflation was running at 3.1%.

The October report raises the inflation forecast sharply. The Bank expects CPI inflation to “rise to about 3.5% by the end of the year” and to “average 3% in 2027, a percentage point above the July projection, then come down to 2% in the middle of 2028.” It now assumes Brent averages about US$100 a barrel in the fourth quarter of 2026, easing to around US$75 by the end of 2028. Growth was revised up to 1% in 2026 and 2% in 2027 and 2028, after GDP grew 3.3% in the second quarter.

Why Did the Bank of Canada Raise Rates

The case for moving was precautionary. Inflation had not spread far beyond energy, but the Bank had signalled since September that it would not wait for it to. Its September statement said upside risks to inflation had increased, and Governor Macklem told reporters that month that “if it takes more than one increase, we’re prepared to do that.” Abroad, the Bank noted that “inflation has risen in most countries.”

The evidence that worried the Bank was about the future more than the present. On decision day, the Bank said “near-term household and business inflation expectations have risen, while longer-term inflation expectations remain well anchored.” In its third-quarter Business Outlook Survey, released October 19, about half of businesses surveyed said they planned to pass at least some higher costs on to customers, more than in the previous quarter, and the share planning for a recession fell to 6% from 17%. Firms that expect demand to hold up feel able to raise prices. Statistics Canada reported that industrial product prices climbed 14.5% from a year earlier in September, suggesting cost pressure is building further up the supply chain.

Governing Council “considered two policy options: hold or hike.” Governor Macklem said the main argument for holding was that the rise in inflation “has so far been concentrated in energy prices and in services that rely heavily on energy inputs, such as airfares.” The main argument for an increase was that “energy prices are higher, they are expected to remain higher, and cost pressures are building.”

That was the argument the economists who called the increase leaned on. “Central bankers can no longer look through the inflationary impact of high energy prices,” Desjardins wrote after the September inflation data, adding that it expected broader consumer price increases to follow. Scotiabank said there was “probably enough supporting evidence for a hike.” Even the head of the C.D. Howe Institute, whose policy council favoured a hold, said a central bank can look through a supply shock only “up to the point where expectations start to become de-anchored.”

The present data shows why the decision was close. The Consumer Price Index rose 3.1% in September, back above the top of the Bank’s 1% to 3% control range, but gasoline did most of the work, jumping 6.1% in a single month. Excluding gasoline, prices rose 2.2%, and the Bank’s preferred core measures, CPI-trim and CPI-median, eased to 1.8% and 1.9%, below the 2% target. BMO, which reluctantly moved its own call to a hike, said the September report offered “precisely zero evidence” that energy costs were spreading.

The job market was weakening too. Statistics Canada’s Labour Force Survey showed employment fell by 68,000 in September after a 42,000 drop in August, with unemployment at 6.5%. TD Economics, which argued for a hold, called a hike at this point “premature,” citing weak wage growth and new US auto tariffs expected in January. At 2.50%, the policy rate sits below 2.75%, the midpoint of the Bank’s estimated neutral range of 2.25% to 3.25%.

The increase also lands unevenly. Quebec lost 49,000 jobs in September and Ontario 20,000, while Alberta added 23,000. One national rate now rises in provinces where hiring has stalled and in one where it has not.

How Does Today’s Announcement Affect Your Variable Mortgage

Today’s announcement increases the interest cost on all floating-rate products across Canada. How the increase reaches your variable mortgage depends on your mortgage type. With an adjustable-rate mortgage (ARM), the monthly payment rises and falls with prime. On a $500,000 balance with 25 years remaining, a quarter-point increase would add about $70 a month; on $300,000, about $42. With a variable-rate mortgage (VRM) with fixed payments, your monthly payment stays the same, but more of it goes to interest. On the same $500,000 balance, a quarter-point move would shift about $104 a month from principal to interest, slowing down your payoff and adding years to your amortization.

After enough increases, a fixed-payment variable reaches its trigger rate, the point at which the payment covers only interest. Your mortgage contract states yours; ask your lender how and when it will contact you if you approach it. Use our payment shock calculator to run your own numbers.

If you are weighing whether to stay variable, compare your rate with the fixed rate you could lock today. Divide the gap by a quarter point to find how many increases it would take to erase it. That is your cushion, and it is a simpler guide than any mortgage rate forecast.

What Happens to Fixed Mortgage Rates?

An increase does not affect an existing fixed mortgage. It can affect the rate offered at renewal or on a new fixed term, and fixed mortgage rates follow Government of Canada (GoC) bond yields rather than the Bank’s decision alone.

Bond markets had largely priced in this move. The Bank’s bond yield tables put the 5-year yield at 3.64% on October 19, up from about 2.6% before late February, and the 2-year yield at 3.33% on October 23, more than a full percentage point above the old policy rate. The 2-year moves ahead of the Bank: on October 19, as markets repriced the odds of a hike, it jumped about 14 basis points in a single afternoon. Lenders had already raised some advertised fixed rates from early September, by 10 to 50 basis points at Canada’s largest banks, according to Canadian Mortgage Trends.

RBC made the point before the decision that, for anyone borrowing at a fixed rate, the direction of rates matters more than the timing of the first move, since a shift of a few months makes little difference to 5-year and 10-year yields. Markets were pricing 4 quarter-point increases by the end of 2027, including this one, which would take the policy rate to 3.25%. Fixed rates can ease after a hike if bond markets decide the increase covers what is needed, or rise if pricing in further increases builds. Nesto’s lowest insured 5-year fixed rate is 4.59%.

How Affordability Shifted Across Canada

Should You Renew Now or Wait

Renewal timing should follow your maturity date, mortgage strategy and the rate available to you, not the Bank’s calendar. About 12% of all outstanding mortgages are pandemic-era 5-year fixed loans renewing within a year, according to the Bank’s Financial Stability Report, with payments rising about 15% on average. The strain is real but concentrated: the C.D. Howe Institute estimated that scheduled payments across all households rise by less than 2%.

A rate hold protects you from further increases while you compare offers. It requires an application and runs up to 150 days on 5-year fixed and 5-year variable terms and up to 120 days on other terms at nesto; on a variable, it locks your discount from prime rather than the rate itself. Look beyond the rate to prepayment privileges and portability. If you move an uninsured mortgage to another federally regulated lender without increasing the loan or the amortization, OSFI waives the stress test requirements.

What Borrowers Were Choosing Before the Decision

Nesto application data showed borrowers leaning further into variable right up to the increase. Between August 5 and September 1, 64.1% of applications carried a variable product. From September 2 to October 18, that rose to 68.3% before easing to 64.4% from October 19 to 23, the week inflation data landed, and markets began pricing in a hike. Quebec stood out, with the variable share climbing from 69.4% to 77.9% before settling at 75.8%. In Ontario, it moved from 50.4% to 55.8%, then to 53.8%.

Funded loans moved the other way, with the fixed share of closings rising from 34.2% to 43.2% as earlier applications closed. These are internal, directional figures and all predate the decision.

What Could Change Before December 9

The next decision is on December 9, without a Monetary Policy Report; the next report is due January 27, 2027. The Bank said “there could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully,” and Governor Macklem said the Bank would take future decisions “one meeting at a time.” Forecasters who called this move did not expect a rapid sequence of rate hikes. BMO and Desjardins each expected one further increase in January 2027, while Scotiabank had forecast 3 increases by early 2027.

Two economic data releases will shape December. The October inflation report on November 16 will show whether price pressure has spread beyond gasoline, and if it has, the case for a second increase builds quickly. The October jobs report on November 6 cuts the other way: further losses would argue for a pause after one move. Trade hangs over both. After negotiations broke down in late August, the US imposed a 50% tariff on a range of Canadian goods, and the Bank now puts the average US tariff on Canadian goods at 7.5%, up from 5.0% in July. About 80% of Canadian goods exports to the US remain tariff-free. Our mortgage rate forecast tracks the same inputs over a longer horizon.

Final Thoughts

The Bank has started raising rates again, carefully. Variable and adjustable borrowers will feel the increase once lenders raise prime; existing fixed mortgages are unaffected; and anyone renewing faces rates set by bond yields that moved well before the Bank did.

If you’re renewing before the end of the year or buying now, connect with nesto mortgage experts to compare fixed and variable options for your timeline and ask about a rate hold.

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