Bank of Canada says further rate hikes possible but will proceed cautiously

OTTAWA · The Bank of Canada may need to raise interest rates further, its governing council said, but it is proceeding with caution. The council released a summary of deliberations from its October meeting, when it increased its key policy rate for the first time since 2023. Members acknowledged facing considerable uncertainty and said they would make monetary policy decisions one meeting at a time. The central bank raised its policy rate by a quarter of a percentage point to 2.5 per cent last month. It also raised its inflation forecast, now expecting the annual rate to hit 3.5 per cent by the end of this year and remain above three per cent for much of 2027.

The rate hike was aimed at reducing the risk that stubbornly high oil prices become persistent inflation. Council members agreed monetary policy cannot lower global energy prices but can prevent them from leading to generalized inflation. "Members underlined that their outlook was still subject to considerable uncertainty about the war in the Middle East, Canada‑U.S. trade relations, global financial conditions, the speed and extent of pass‑through and how businesses and households would react to these developments," the summary said. "They agreed they would need to continue to take these sources of uncertainty into account when setting monetary policy." The central bank has previously said it would "look through" the direct impact of the Middle East war on inflation but not allow higher energy prices to become broad-based and persistent. The summary noted the conflict is now in its eighth month with no resolution in sight. "With the war in its eighth month and no resolution on the horizon, members exchanged views on whether a higher policy interest rate was needed to mitigate the risk that higher energy costs would spread to other goods and services," the summary said.

The summary stated that higher costs have largely not been passed through to consumers so far. However, the bank's own surveys suggest businesses expect to raise some prices over the next year. The governing council's deliberations provide insight into the reasoning behind the October increase, which was the first hike in three years. Yadude Books reported in October that the economy stalled in August, raising questions about the central bank's next move. The Bank of Canada's next scheduled interest rate decision is set for Dec. 9.

With files from The Canadian Press, BNN Bloomberg and The Globe and Mail