Interest Rates: Bank of Canada hikes cost of borrowing

Canadian homeowners and borrowers face higher monthly payments on variable-rate mortgages and credit lines following a rate increase announced Wednesday. The Bank of Canada raised its key policy rate by 25 basis points to 2.5 percent, marking the first change to the rate since July 2023. The move aims to counter rising inflation driven by high oil prices and trade tensions.

Ontario Premier Doug Ford reacted sharply to the decision, calling it a massive mistake in a social media post released before the official announcement. Ford argued that higher rates would not solve the underlying economic issues, such as the flow of oil through the Strait of Hormuz or the level of tariffs on Canadian businesses. He stated that the hike would make life more expensive for families and workers, punishing them for factors outside their control.

The central bank’s decision comes as its economic outlook shifts. The institution revised its inflation forecast for 2027 upward to 3.1 percent, compared to the 2 percent predicted in July. Economic growth is projected at 1 percent for 2026 and 2 percent for 2027. Officials described this as a somewhat stronger growth projection than what was forecast in the summer.

In a news release, the Governing Council stated that the rate increase is intended to reduce the risk that high energy prices spread to other goods and services. The bank noted that further rate increases could be necessary but agreed to proceed carefully given current uncertainties. Officials explained that raising rates encourages saving and discourages borrowing, which slows economic activity and helps curb inflation.

Ontario Finance Minister Peter Bethlenfalvy offered a more measured response while acknowledging the political pressure for lower rates. Speaking at a news conference before the hike became official, he noted that the Bank of Canada is an independent organization with access to all relevant facts. He emphasized that keeping inflation in check remains a priority, even as the province prepares to deliver its fall economic statement on Thursday.

The previous adjustment to the policy rate occurred on October 29, 2025, when the bank cut rates by 25 basis points. Since then, the rate had remained steady until Wednesday’s increase. The bank’s website explains that when the economy grows too fast, prices tend to rise, and higher interest rates serve as a brake on spending and borrowing.