Update: Bank of Canada May Need Further Rate Hikes to Curb Inflation Risks After First Increase Since 2023

11:44 AM EDT, 10/28/2026 (MT Newswires) -- (Updates with Governor Macklem remarks in the 4th and 6th paragraphs, KPMG comments in the 5th paragraph and TD comments in the last paragraph.) The Bank of Canada raised its policy rate by 25 basis points to 2.50% on Wednesday, its first increase since July 2023, warning that further hikes may be necessary to contain inflationary pressures stemming from elevated energy prices linked to the Iran war. "The main argument for an increase was that energy prices are higher, they are expected to remain higher, and cost pressures are building," Governor Tiff Macklem said in his opening remarks. The governor added that further increases may be needed, although policymakers would proceed cautiously amid economic uncertainty. The rate hike would help prevent inflation from spreading across the economy, promoting stability and bringing inflation down over time, which would benefit both Canadians and businesses, even if the effects aren't immediately felt, said Macklem at the subsequent rate hike decision press conference. "The Bank has shifted from wanting to see the pass-through of energy prices into inflation to wanting to get ahead of those effects, a shift in its reaction function," wrote KPMG Canada Chief Economist Ali Jaffery in a note. The governor added he will not provide forward guidance as decisions will be taken one policy meeting at a time. The 25bps rate increase was in line with a Bloomberg survey. The central bank's latest Monetary Policy Report raised its 2026 year-end inflation outlook to around 3.5%, from an average of 2.5% projected in July. It now expects inflation to average 3% in 2027 and 2% in mid-2028. The Bank also revised its growth forecasts higher, projecting GDP growth of 1% in 2026 and 2% in both 2027 and 2028, compared with previous estimates of 0.7% and 1.8%, respectively. Following the rate decision, two-year government bond yields moved higher by only a couple of basis points and the Canadian dollar remained relatively unchanged, wrote TD Economics economist Marc Ercolao in a note.