• Bank of Canada raises 2026 GDP growth forecast to 1.0% from 0.7%, and 2027 to 2.0% from 1.8%.
  • Inflation projections jump to 2.9% for 2026 and 3.1% for 2027, up from 2.5% and 2.0%, respectively.
  • Brent crude assumed to average around $100 per barrel in Q4 before easing toward $75 by end-2028.

A More Difficult Policy Mix

The Bank of Canada has upgraded its growth outlook but significantly raised its inflation forecasts, presenting a tougher trade-off for policymakers. The central bank now expects the economy to expand 1.0% in 2026, up from 0.7%, and 2.0% in 2027, versus 1.8% previously. However, inflation is projected to reach 2.9% in 2026 and 3.1% in 2027—sharp revisions from earlier forecasts of 2.5% and 2.0%. The bank also assumes Brent crude will average around $100 per barrel in the fourth quarter before gradually declining to $75 by the end of 2028.

The revisions underscore concerns that expensive energy could prove more persistent than initially thought. Governor Tiff Macklem had previously warned that sustained high crude and petroleum-product prices would necessitate a significant forecast adjustment.

Inflation Persistence in Focus

The headline numbers mask a more nuanced picture. September headline inflation hit 3.1%, but the Bank's preferred core measures—CPI-trim and CPI-median—stood at just 1.8% and 1.9%, respectively. That gap suggests the immediate problem is concentrated in energy rather than a broad-based inflation breakout. Still, the risk is that elevated fuel costs seep into wages and services prices, forcing the central bank to act.

Markets were already anticipating tighter policy. According to pre-decision reporting, most economists expected a quarter-point rate hike from 2.25% to 2.50%—which would be the first increase since 2023. That expectation, however, should not be confused with confirmation of today's decision.

Oil and Trade Shocks Complicate Outlook

Canada's status as a net energy exporter cuts both ways. Higher oil prices support export income and government revenues, but they also squeeze households and energy-intensive businesses. The Parliamentary Budget Officer estimates that a sustained US$10-per-barrel increase in oil prices would boost annual federal revenues by roughly C$2.9 billion, though exchange-rate fluctuations can alter that figure.

Meanwhile, the Bank is grappling with the economic fallout from Middle East energy disruptions—including shipping interruptions through the Strait of Hormuz—and ongoing Canada-U.S. trade friction. The PBO estimates that bilateral tariff measures introduced since early 2025 could reduce the medium-term level of Canadian real GDP by approximately 1.4% if they remain permanent. Government support measures, including C$7.5 billion in additional tariff aid and C$2.7 billion in temporary fuel-excise-tax relief for 2026-27, may cushion the blow but do not address the underlying shocks.

Divergent Views Among Economists

Not everyone agrees on the need for tightening. In a Wall Street Journal (NWSA) survey, 11 of 15 economists expected a quarter-point hike, but TD (TD)'s Andrew Kelvin argued that an October increase would be a "needless risk," reflecting concern about tightening into an energy-driven shock. Consumer inflation expectations have also climbed to around 4%, strengthening the case for preventive action.

Governor Macklem and Senior Deputy Governor Carolyn Rogers are scheduled to explain the report at a press conference later this morning. As of 9:47 a.m. EDT, the Bank's official pages still displayed the event notice and July's Monetary Policy Report, so the exact new projections have not been independently verified from the October report. Pre-announcement reporting corroborates the anticipated upward inflation revision, but today's interest-rate decision has not been confirmed.

Clarification: An earlier version of this article misstated the previous 2026 inflation forecast as 2.5%. It has been corrected to 2.5% from 2.0%.