The Bank of Canada raised its target for the overnight rate by 25 basis points to 2.5 percent on Wednesday, marking its first interest rate increase since July 2023.

Governor Tiff Macklem said the move aims to reduce the risk that persistently high oil prices from the Middle East conflict spill over into broader inflation. Global oil prices have risen and are expected to stay elevated due to the ongoing war involving Iran.

The bank revised its inflation outlook higher. It now projects annual inflation to reach about 3.5 percent by the end of 2026 and remain at or above 3 percent through much of 2027 before returning close to the 2 percent target by mid-2028.

Canadian businesses have shown resilience, with the economy adapting to U.S. trade tensions. The bank noted that growth forecasts improved slightly despite these pressures.

Macklem emphasized that the governing council will proceed carefully with future decisions, taking them one meeting at a time. Markets anticipate the possibility of additional hikes in the coming year.

The decision comes as Canadians face higher costs at the pump from elevated energy prices. The bank highlighted that elevated refinery margins and oil costs have pushed CPI inflation around 3 percent since April.

Uncertainty remains high due to the lack of resolution in the Middle East conflict and ongoing trade dynamics with the United States. The next rate announcement is scheduled for December 9, 2026.