The Bank of Canada has ended its long pause, raising its policy rate by a quarter percentage point to 2.50%. The hike was expected. CAD’s muted initial response is a useful reminder: delivering the expected decision does not give the market much new to buy.
The policy shift still matters. The Bank is more worried that expensive energy will spread into everyday prices, and a modestly stronger economy gives it more room to respond. Further hikes are possible, with the pace left open.
The change from September to October
| Area | Previous meeting — 2 September | Latest meeting — 28 October |
|---|---|---|
| Actions | Held rates at 2.25%. | Raised rates to 2.50%, as expected. |
| Forward Guidance | Ready to adjust policy as conditions evolved. | Further increases may be needed; decisions remain meeting by meeting. |
| Tone | Cautious, with growing inflation concerns. | More willing to tighten, while acknowledging an uncertain recovery. |
| Wording | “prepared to adjust monetary policy as needed” | “increase the policy rate further”, tempered by “proceed carefully”. |
| Risks | Energy spillovers and tariffs threatened the outlook. | Persistent costs spreading into selling prices become more pressing; trade risks remain. |
| Data focus | Strength of the recovery and whether inflation was broadening. | Business pricing, inflation expectations, underlying inflation and economic resilience. |
The shift is from watching the inflation risk to acting against it.
Why the Bank moved
Core inflation, a gauge of underlying price pressure, remains close to 2%. The concern is what comes next: businesses have absorbed much of the increase in fuel and other input costs, but the Bank expects more of those costs to reach customers. A higher delivery bill can eventually become a higher shelf price.
The annual forecasts show the problem clearly. July estimates appear in parentheses:
| Year | Economic growth | Consumer-price inflation |
|---|---|---|
| 2026 | 1.0% (0.7%) | 2.9% (2.5%) |
| 2027 | 2.0% (1.8%) | 3.1% (2.0%) |
| 2028 | 2.0% (1.8%) | 2.2% (2.1%) |
Inflation is expected to return close to 2% around mid-2028. Stronger investment and exports support the recovery, although tariffs are expected to slow growth in the fourth quarter.
Governor Tiff Macklem also said the policy rate remains low enough not to restrain growth. Senior Deputy Governor Carolyn Rogers highlighted uncertainty weighing on housing. That explains the balance: enough resilience to raise rates, enough vulnerability to move carefully.
What it means for CAD
USD/CAD initially swung about 40 pips in two-way trading before drifting only around six pips below its pre-decision level—a small CAD gain. By 15:05 UTC, CAD was broadly unchanged following the announcement.
CAD subsequently recovered some ground and is outperforming USD and JPY over recent hours, while GBP leads and EUR is slightly ahead. That is a firmer showing, although weakness in the opposing currencies is part of the picture.
My read is continued policy support for CAD, with limited fresh surprise. A stronger currency move still needs evidence that traders are raising Canadian rate expectations relative to other countries. The hike alone does not establish that.
USD/CAD also has another central bank to get through tonight. A hawkish Fed could strengthen USD even if the Canadian story remains supportive.
What Invalidates This Thesis
CAD’s policy support weakens if energy prices fall faster than expected, underlying inflation stays contained or weaker demand persuades the BoC to pause for longer. For USD/CAD specifically, a stronger upward shift in US rate expectations could outweigh Canadian tightening.