The Bank of Canada raised its key interest rate by 25 basis points to 2.5 per cent on Wednesday, blaming higher, more persistent inflation for its first rate hike since 2023 and warning that it could not rule out additional increases.

The central bank now projects inflation will remain above three per cent throughout the rest of 2026 and much of 2027, according to its October Monetary Policy Report, which was also published on Wednesday.

In the report, the bank revised its projected average inflation rate upward to 2.9 per cent for 2026 — 0.4 percentage points higher than July forecasts — and 3.1 per cent in 2027, 1.1 percentage points higher than the July report. Stubbornly high energy prices and higher non-energy import costs will continue to put pressure on inflation into early 2027 before easing in early 2028, the report said.

The bank’s decision comes following months of concern over elevated inflation. Canada’s inflation rate ticked up to 3.1 per cent in September after holding at three per cent in July and August. Energy prices have been a significant component, rising by around 19 per cent year over year in September.

Core inflation measures have stayed relatively tame at around two per cent, however, which suggests high inflation has been limited to a few components such as gasoline, travel services and intercity transportation.

But the Bank of Canada said cost pressures are building, and pass-through is expected to materialize in the coming months. The bank’s most recent Business Outlook Survey found that roughly half of firms surveyed said they are planning to pass the higher fuel costs onto consumers by the end of the year.

Meanwhile, the central bank bumped up its projections for the Canadian economy.

Real GDP growth is now expected to be around one per cent in 2026, 0.3 percentage points above July forecasts, before strengthening to two per cent in 2027 and 2028 — up 0.2 percentage points from July — as strong consumer spending continues and exports pick up. Business investment is also expected to strengthen, partly due to the Productivity Mega Deduction, which was announced in September. Several major infrastructure projects that are expected to take shape next year were also taken into account, Bank of Canada officials said.

However, the central bank noted that the inflation and growth outlooks remain fluid due to heightened uncertainty around war in the Middle East and U.S. trade policy.

“What we don’t want is those higher energy prices to pass through and raise the prices of other goods and services that … Canadians are buying,” Bank of Canada governor Tiff Macklem told reporters at a press conference after the announcement.

“Monetary policy needs to be forward looking. The policy rate, even with this increase, it’s still low enough that it’s not restraining growth. By increasing it, we’re going to mitigate this pass-through of higher energy prices, and that’s going to help get inflation back to target more quickly.”

Wednesday’s hike was widely anticipated by economists after Macklem struck a hawkish tone on the sidelines of an International Monetary Fund meeting earlier this month.

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But the Bank of Canada governor didn’t say whether additional hikes are coming. Economists and central bank officials said the neutral rate is around 2.75 per cent.

“We’re going to take this one meeting at a time. There is no predetermined path for interest rates. We’ve indicated there could be a need for further policy rate increases, but we are conscious that uncertainty is high, and we’re going to take these decisions one meeting at a time,” Macklem said.

“Neutral is a range. Our range is 2.25 per cent to 3.25 per cent. At 2.5 per cent, we’re getting closer to the middle of the range. We’re not going to prejudge that.

• Email: ptran@postmedia.com