Bank of Canada Raises Its Rate to 2.5%. Fixed Loans Did Not Reset.
The Bank of Canada announced on October 28, 2026, that it had raised its overnight target by 25 basis points to 2.5%. This policy adjustment is part of efforts to address ongoing inflation pressures while supporting moderate economic growth. The accompanying Monetary Policy Report (MPR) outlines revised projections showing GDP growth strengthening to an average of 2% in 2027 and 2028, despite challenges from US tariffs, energy costs, and trade uncertainty.
The October 28, 2026 Rate Decision
The Bank of Canada lifted its overnight target from 2.25% to 2.5% on October 28, 2026. The report states that variable-rate contracts can reprice immediately while fixed-rate payments remain locked. This distinction matters for how the policy change transmits to borrowers. The decision takes effect the day after the announcement, consistent with the Bank's post-2021 convention.
Inflation is projected to stay above 3% through much of 2027—about one percentage point higher than expected in the July Report—before easing toward the 2% target by the middle of 2028. Elevated energy and import costs are expected to feed through to consumer prices alongside diminishing slack in the economy. Growth has been revised up to 1% for 2026 and is expected to average 2% in 2027 and 2028, supported by business investment, government spending, and fading inventory effects.
Transmission to Variable-Rate and Fixed-Rate Loans
Variable-rate loans adjust with changes in short-term interest rates. In Canada, the Bank of Canada's policy rate influences the prime rate and other benchmarks that variable-rate mortgages follow. Borrowers on these contracts will see their payments reprice immediately, potentially increasing the monthly amount starting from the effective date.
Fixed-rate mortgages lock the interest rate for the full term at the time of origination. The contractual principal-and-interest payment therefore stays the same regardless of later changes in the policy target. The MPR does not indicate any reset or adjustment to these existing fixed-rate obligations.
This separation is standard: variable-rate products transmit policy rate changes directly and quickly, while fixed-rate products protect borrowers from short-term rate volatility by maintaining the original payment schedule.
Economic Outlook and Growth Projections
The MPR projects stronger overall growth than in July, with real GDP growth in 2026 revised up to 1% due to mid-year strength partially offset by fourth-quarter weakness. Consumption growth is expected to settle around 2% on average in 2027 and 2028, supported by income gains from past terms-of-trade improvements even as higher long-term interest rates weigh on borrowing.
Business investment is projected to grow by about 4% on average in 2027 and 2028, driven by the Productivity Mega Deduction, AI adoption, and major projects office ramp-up. Government spending is forecast to increase by about 2½% on average over the same period, reflecting provincial and federal outlays in health, education, infrastructure, and defence.
Export growth slows to around 1¼% in 2027 as US tariffs restrain non-commodity exports, then picks up in 2028 as the drag diminishes. Import growth moderates from about 3% in 2026 to around 2% in 2027 and 2028, with higher foreign prices, counter-tariffs, and past Canadian dollar depreciation contributing to cost pressures.
Implications for Canadian Households, Workers, and Businesses
Variable-rate borrowers—such as those with adjustable-rate mortgages or other floating-rate debt—will experience higher payments starting immediately. This affects homeowners, renters with variable leases, and businesses using floating-rate financing.
Fixed-rate borrowers, including those holding existing mortgages, will see no change to their monthly payments. The hike does not alter the locked rate or contractual amount on those loans.
The report notes residential investment will remain weak, increasing by slightly less than 1% on average in 2027 and 2028 due to affordability constraints, slow population growth, and rising borrowing costs. Energy and imported input costs are expected to make construction more expensive, further restraining building activity.
Business investment accelerates with incentives lowering the cost of capital, though responses remain uncertain. Labour markets are close to balanced, supporting steady consumption growth without material upward pressure on inflation from wage costs.
Looking Ahead and Evidence to Monitor
The MPR emphasizes elevated uncertainty about future energy prices and US trade policy evolution. Households and businesses should watch upcoming data on CPI components, residential investment, and business surveys for signs of how cost pass-through evolves.
As of the October 28, 2026, report date, inflation remains projected above 3% through much of 2027, with gradual easing thereafter. The growth outlook supports moderate expansion in 2027 and 2028 despite these pressures.
This analysis is based solely on the October 28, 2026, Monetary Policy Report and distinguishes the policy decision's immediate effects from longer-term projections and mechanisms.