Key Takeaways
- Governing Council deliberated two options — hold at 2.25% or hike to 2.50% — and chose the hike to stop high energy prices becoming broad, persistent inflation.
- Members now expect inflation to reach 3.5% at the end of 2026 and stay above 3% through much of 2027, returning to 2% only by mid-2028.
- Members agreed there could be a need to raise the policy rate further, but will decide one meeting at a time.
Hold or hike? Inside the room, it came down to oil
The Bank of Canada had two choices: hold rates or risk higher inflation. Oil tipped the balance.
The Bank of Canada considered keeping interest rates unchanged. Then it looked at oil.
A newly published summary of the deliberations from its October 28 meeting reveals how closely Governing Council debated whether to hold the policy rate at 2.25% or raise it to 2.50%. Both options had a case. But one risk ultimately proved harder to ignore: expensive energy spreading into the rest of the economy.
The argument for keeping rates steady
Inflation wasn't running out of control everywhere.
Excluding gasoline, inflation was still 2.2%. Core inflation measures remained close to 2%, some slack remained in the economy, and new U.S. tariffs were expected to weigh on growth.
Much of the inflation increase was concentrated in energy and energy-sensitive services, including airfares.
That gave the Bank a reason to wait.
But oil was becoming a bigger problem.
Oil changed the calculation
Benchmark oil was about US$35 a barrel higher than the Bank had assumed in July. Futures markets suggested prices would remain elevated for longer, while the Middle East war was entering its eighth month.
Total inflation had hovered around 3% since April.
There was another concern: businesses were absorbing much of their higher fuel and import costs rather than passing them on to customers. But the Bank's surveys showed that businesses expected to pass more of those costs along over the next year.
Governing Council members agreed that history offered a warning: those higher costs eventually find their way into consumer prices.
Waiting could mean allowing today's energy shock to become tomorrow's broader inflation problem.
Inflation could stay above 3% through 2027
The Bank's outlook had shifted.
Members now expected inflation to reach 3.5% by the end of 2026, remain above 3% through much of 2027 and return to the 2% target only by the middle of 2028.
The Canadian economy was also holding up better than expected.
GDP grew 3.3% in the second quarter and about 2% in the third. Unemployment was around 6.5%, and business investment was expected to accelerate.
Housing, however, remained weak.
That combination made the decision difficult: the economy wasn't booming, but it wasn't weakening enough to justify waiting.
Is another rate hike coming?
Governing Council agreed that another increase in the policy rate could become necessary.
But there was no commitment to a predetermined path. Members said they would proceed carefully, assessing data as it came in and deciding one meeting at a time.
Their message was clear: uncertainty wasn't a reason to do nothing.
The Twikup Take
The Bank didn't raise rates because inflation had already spiralled out of control. It raised them because energy prices could push inflation higher and keep it there longer.
Oil is expensive, businesses expect to pass more costs to customers, and inflation could remain above 3% into 2027.
The bigger question for Canadian borrowers isn't whether rates will rise again. It's whether oil gives the Bank a reason to make them rise again.
Image: Bank of Canada, Wellington St, Ottawa, Ontario, Canada by Robert Linsdell, CC BY 2.0, via Wikimedia Commons.