Bank of Canada Inflation Forecast: 3.5% by Year-End for Canadian Households

Bank of Canada Inflation Forecast: 3.5% by Year-End for Canadian Households

The Bank of Canada has projected that CPI inflation will reach about 3.5 percent by the end of 2026. This forecast follows the central bank's decision on November 3, 2026, to raise its policy interest rate to 2.5 percent. The increase was the first since July 2023. The move is intended to manage risks from higher energy prices that could spread through the economy. For Canadian households, this sustained inflation may reduce purchasing power and keep borrowing costs elevated for variable-rate loans. US readers may note potential cross-border effects on trade and energy.

The Policy Rate Decision

On November 3, 2026, the Bank of Canada increased its overnight target interest rate by 25 basis points to 2.5 percent. This was the first interest rate increase since July 2023. The decision was made after the Bank outlined two important economic developments since the July Report. First, the outlook for inflation has deteriorated. Global oil prices have increased because of the war in the Middle East and are expected to remain higher for longer. This is hitting Canadians at the gas pump and increasing costs for many businesses. Second, the growth outlook for Canada has improved modestly, despite continued trade actions by the United States. Growth picked up through the middle of the year, and exports and business and government investment are expected to support a further recovery. With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate was needed to reduce the risk that elevated energy prices could spill over and become generalized inflation.

CPI Inflation Outlook

The Bank’s Monetary Policy Report projects CPI inflation to rise to about 3½ percent by year-end. Inflation has been around 3 percent since April and is expected to stay at or above 3 percent through much of 2027 before returning close to the 2 percent target by the middle of 2028. The prices of gasoline, diesel and heating oil are elevated and are expected to remain higher for longer. This is hitting consumers directly and raising business costs for production and transportation.

Energy Prices and Cost Pass-Through

Higher energy prices are a primary factor in the current inflation outlook. The conflict in the Middle East has kept global oil prices elevated. While businesses have mostly absorbed higher input costs so far, past experience and Bank surveys suggest that cost pass-through will increase over the next year. The combination of higher energy prices and pass-through increases the persistence of inflation. In addition, with the economy expected to recover, there is less downward pressure on prices to offset these cost pressures. With elevated inflation expected to last longer and the economy showing resilience, Governing Council agreed that risks to inflation had increased and there was less scope for monetary accommodation.

Economic Growth Projections

Growth picked up in Canada through the middle of the year. GDP growth was 3.3 percent in the second quarter, and recent indicators point to growth of about 2 percent in the third quarter. Consumer spending has been solid, and exports and business investment have rebounded. The unemployment rate has remained around 6½ percent for several months. A broad set of indicators continues to point to some excess supply in the economy. Looking ahead, growth will likely slow in the fourth quarter as new US tariffs weigh on activity. But growth should pick up again in 2027 as consumer spending continues, exports pick up and business investment strengthens, supported by fiscal measures. Following GDP growth of 1 percent in 2026, the economy is projected to grow by about 2 percent in 2027 and 2028.

Implications for Households and Uncertainty

For Canadian households, the combination of higher inflation and the policy rate hike means sustained price pressures on fuel and goods. Variable-rate loans and new borrowing will feel the impact at once. Fixed-rate mortgages remain unchanged. For US readers, potential cross-border effects on trade and energy are possible through tariffs and energy markets. The Bank remains committed to maintaining Canadians’ confidence in price stability through this period of global upheaval. Uncertainty is still elevated. Developments in the Middle East and Canada-US trade relations both remain fluid. There is also uncertainty about the impact of new US tariffs and how much energy costs will seep into consumer prices more broadly. The Bank will take future decisions one meeting at a time. There could be a need to raise the policy rate further, but given the uncertainties, the Governing Council will proceed carefully.

To watch next: the next Bank of Canada meeting, updates on Middle East developments, and the impact of US tariffs on Canadian exports and import costs. Concrete evidence to monitor includes oil price movements, pass-through rates from business surveys, and actual CPI components.