The Bank of Canada has raised its key interest rate for the first time in more than three years, warning that further increases could be needed to bring inflation under control.

The central bank announced a quarter-point increase on Wednesday, October 28, bringing its benchmark rate to 2.5 per cent.

Speaking at a news conference following the announcement, Governor Tiff Macklem said rising energy prices linked to the ongoing conflict in the Middle East are creating new inflation pressures across the Canadian economy.

Higher oil prices have already increased costs at the gas pump, but Macklem says the greater concern is that businesses will begin passing those additional expenses along to consumers.

The bank now expects inflation to reach approximately 3.5 per cent by the end of 2026 and remain at or above three per cent through much of 2027.

That’s a significant change from its July forecast, when the bank expected inflation to return closer to its two per cent target much sooner.

Macklem said policymakers considered both holding rates steady and increasing them, ultimately deciding that the risk of inflation spreading beyond energy prices justified an increase.

He also pointed to a Canadian economy that has performed better than expected in recent months, despite continued uncertainty surrounding trade relations with the United States.

The bank now expects economic growth of one per cent this year, followed by approximately two per cent in both 2027 and 2028.

While the outlook for economic growth has improved, Macklem cautioned that additional interest rate increases remain possible.

“There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully,” Macklem said.

Higher interest rates can increase borrowing costs for Canadians, particularly those with variable-rate mortgages, lines of credit and other loans.

The bank expects inflation to return close to its two per cent target by the middle of 2028.

Its next scheduled interest rate announcement is December 9.