Bank of Canada Hikes Rates for First Time in 3 Years

The Bank of Canada raised its key interest rate by 25 basis points to 2.50% on Wednesday, October 28, 2026 — its first hike in more than three years. The bank said further increases might be needed to stop soaring energy costs from driving broader inflation, and Canadian bond yields jumped to a two-year high in response.

What happened, in one answer

The Bank of Canada hiked its overnight rate to 2.50%, up from 2.25%. It was the bank's first increase since July 2023 and its first policy change in almost a year, after holding at 2.25% through seven consecutive meetings. It came the same day the US Federal Reserve held at 3.75% to 4.00% — Canada tightening while the Fed paused.

Why did the Bank of Canada hike now?

The short answer is energy inflation, and the fear that it spreads. Canada's annual inflation rose to 3.1% in September, driven almost entirely by energy, while core measures that strip out volatile items eased below 2%, the midpoint of the bank's 1% to 3% target range. What changed the calculation was persistence: oil prices kept climbing on Middle East supply fears, and Governor Tiff Macklem warned that the longer fuel costs stay high, the more likely they are to spill into other prices.

"The longer energy prices remain high, the more likely it is these costs will spill over to consumer prices more broadly," Macklem said after the decision. US crude futures rose 3.1% to $102.98 a barrel on Wednesday as fighting in Yemen and an attack on a refinery in Saudi Arabia renewed supply concerns — exactly the backdrop the bank said it could no longer wait out.

How did markets react?

Bond markets moved first. The Canadian two-year yield rose as much as 7.2 basis points to 3.441%, its highest level since August 2024, before easing back to 3.413%. The 10-year yield rose 2.4 basis points to 3.885%. The Canadian dollar — the loonie — edged 0.1% higher to 1.4035 per US dollar, or 71.25 US cents.

TD Securities noted the reaction built through the session, and flagged a pattern that matters next: "The Bank of Canada has a tendency to move consecutively after a long pause, and we see a lower bar for a subsequent hike in December."

Why is this blowing up?

Three things make this more than a routine move. First, the direction: Canada is one of the first major economies to start hiking again in this cycle, because of an energy shock rather than a hot domestic economy. Second, the signal: the bank openly said more hikes might be needed. Third, the timing: it landed hours before the Fed's hold, in a week with ECB and Bank of Japan decisions still to come, so traders read it as an early tell on how policymakers are treating oil-driven inflation risk. The decision was widely expected — 19 of 34 economists in a Reuters poll forecast exactly this hike, and a majority expected one more rise before March.

What happens next?

Markets are already pricing the follow-up. Swap data showed investors see a 45% chance of another hike in December, and have fully discounted a second hike by January. BMO's Canadian rates strategist Benjamin Reitzes cautioned that market pricing of roughly 3.5% by the end of next year looks "a bit on the aggressive side," though he still expects at least one more hike in December or January. The constraint is growth: the bank's soft fourth-quarter outlook — Reitzes cited a GDP forecast of just 0.8% — gives policymakers reason to check that the economy is rebounding before hiking into weakness. Macklem himself stressed that uncertainty remains elevated, with Middle East developments and Canada-US trade relations both fluid.

For borrowers, the effect is straightforward: a higher policy rate feeds into lending and mortgage costs, reversing the cut that took the rate to 2.25% in October 2025. Whether this was a one-off insurance move or the start of a hiking run depends on how long energy prices stay elevated, and whether inflation expectations keep climbing.

Sources

Reuters — Canadian 2-year yield hits two-year high as BoC hikes interest rates
Canadian Mortgage Professional — The big question: How many more BoC rate hikes are ahead?
Kitco / Reuters poll — Bank of Canada to raise rates to 2.50% on October 28

FAQ

What did the Bank of Canada do on October 28, 2026?

It raised its key overnight rate by 25 basis points to 2.50%, its first hike since July 2023 and its first policy change in almost a year.

Why did Canada hike while the Fed held rates?

Canadian inflation hit 3.1% in September, driven by energy prices. The Bank of Canada judged that waiting risked fuel costs spreading into broader inflation, while the Fed chose to hold at 3.75% to 4.00% the same day.

How did markets react to the hike?

The Canadian two-year yield touched 3.441%, its highest since August 2024, the 10-year rose to 3.885%, and the loonie edged up to 1.4035 per US dollar.

Will the Bank of Canada hike again?

The bank said further increases might be needed. Swap markets price a 45% chance of a December hike and fully price a second hike by January, though analysts say weak growth could slow the pace.