This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on October 28, 2026.
This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision‑making process. This stage takes place after members have received all staff briefings and recommendations.
Governing Council’s policy decision‑making meetings began on October 20, 2026. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Nicolas Vincent, Michelle Alexopoulos and Marc‑André Gosselin.
International economy
Governing Council members began their deliberations by discussing global economic developments. Despite higher oil prices, global growth had been stronger than expected since the July Monetary Policy Report. Investment related to artificial intelligence (AI) in the United States and parts of Asia had contributed to this resilience, while higher energy costs had weighed on growth in the euro area and other oil‑importing countries. Inflation remained elevated in many economies.
In the United States, a solid labour market and rising household wealth from stock market gains had supported robust consumer spending. Strength in consumption, coupled with continued robust investment in AI, was expected to keep the US economy growing at a solid pace. Inflation was expected to stay high through 2026, with producer price data for the United States showing that cost pressures were mounting in supply chains.
In the euro area, economic activity was resilient, due in part to government spending on defence and infrastructure. Growth in gross domestic product (GDP) was expected to slow in the second half of the year as high energy costs weighed on activity; growth was then expected to strengthen in 2027 and 2028.
Economic activity in China had rebounded in the third quarter, supported by strong exports and government spending, while private domestic demand remained weak.
Overall, Governing Council expected global GDP growth to pick up in the second half of the year and stabilize around 3% through the projection horizon. Inflation was expected to remain elevated globally due to high fuel prices driven by reduced oil supply from the Middle East and continued strains on refining capacity.
Members discussed the evolution of global oil prices. The conflict in the Middle East continued to restrict supply, and the benchmark price of oil was approximately US$35 higher per barrel than assumed in the July Report. The oil futures curve had shifted up and out, as markets increasingly expected oil prices to remain higher for longer.
Financial conditions were tighter, with sovereign bond yields up across most advanced economies. Higher yields reflected both expectations for higher policy interest rates and higher term premiums. Bond yields in Canada had also moved up, but not as much as those in the United States. Equity markets had been volatile since the July Report, in part due to investor concerns about the sustainability of earnings growth in the AI sector. The Canadian dollar had depreciated somewhat against a strong US dollar but had recovered to about the same level as assumed in the July Report.
Canadian economy and inflation outlook
Governing Council members discussed developments in the Canadian economy and their outlook for growth and inflation. Members noted that growth in the middle of the year was stronger than anticipated in July. GDP grew 3.3% in the second quarter, and recent indicators suggested that in the third quarter it would grow by about 2%. Although the Canadian economy had shown some resilience while adapting to the changing trade environment, the escalation of trade tensions with the United States at the end of the summer was expected to have a dampening effect on growth in the fourth quarter.
Consumer spending remained solid and was expected to continue to underpin GDP growth. With slow population growth, consumer spending largely reflected rising per person consumption, which had been supported by labour income growth and gains in household wealth.
Energy and other goods exports grew strongly in the second quarter as businesses adapted to the new trade environment. Robust US demand and additional pipeline capacity were expected to continue to support export growth, even as US tariffs continued to hurt exports in affected sectors.
Members discussed the trajectory for business investment. There was more evidence that businesses were investing in AI capabilities, and higher global oil prices were boosting investment in the oil and gas sector. Government incentives such as the Productivity Mega Deduction and investments in major projects were also expected to provide a catalyst for business investment growth. Governing Council members expected business investment to accelerate over the next two years, although trade policy uncertainty posed a downside risk to this outlook. They also acknowledged that, even with this pickup, business investment as a share of GDP remained low compared with history.
In contrast, residential investment was expected to remain relatively weak because slow population growth, affordability constraints, higher mortgage interest rates and elevated uncertainty continued to weigh on housing activity.
Labour market conditions were described as moving sideways since the beginning of the year. Recent Labour Force Survey data indicated that employment growth was subdued overall—public sector employment fell in recent months while private sector employment remained resilient. The unemployment rate remained around 6½%.
Overall, members revised up their outlook for growth in 2026 to 1% and expected growth to strengthen to 2% in 2027 and 2028. Members agreed that there was still some slack in the economy but that the pickup in growth would gradually absorb excess supply.
Members discussed the implications of persistently high crude oil prices and refinery margins on the outlook for CPI inflation. Higher energy prices had pushed total inflation to around 3% since April. So far, this increase had been driven primarily by components directly exposed to energy market developments, such as gasoline and travel services. As a result, core measures of inflation remained near 2% and the share of CPI components rising by 3% or more was near its historical average.
Given the persistence of higher energy prices, members spent considerable time discussing how this shock was raising costs for Canadian businesses. Fuel costs were the main driver of the upward pressure on costs, but businesses were also facing higher costs from non‑energy imports, both final goods and inputs into the production process. These included oil‑derived products such as chemicals, plastics and rubber, as well as semiconductors and other computer components whose prices had risen due to strong demand for AI‑related equipment.
Pass‑through of these costs to consumer prices had so far been limited. But Governing Council members agreed that continued cost pressures would eventually pass through to consumer prices. This conclusion was based on both historical experience and the Bank’s surveys, which indicated that businesses anticipated passing on a greater share of the cost increases over the next year. The extent and speed of this transmission would depend on the persistence of the energy shock. The longer energy prices stayed high, the more likely the associated cost increases would flow through production and distribution networks and affect a wide range of consumer prices.
Near‑term inflation expectations had moved up, but longer‑term expectations remained anchored. Members acknowledged that with the pandemic experience fresh in people’s minds, expectations for inflation may have become more sensitive to recent price changes. Businesses that intended to pass on higher costs to their customers expected inflation to rise in the near term.
Against this backdrop, members raised their outlook for inflation substantially, relative to July. CPI inflation was expected to rise to 3½% at the end of 2026 and remain above 3% through much of 2027, before gradually declining to the 2% target by the middle of 2028.
Considerations for monetary policy
The outlook for inflation was much higher in the October Report than in the July Report. At the same time, the growth outlook had also improved modestly, despite continued trade actions by the United States. With these combined changes to the outlook in mind, members discussed the risks and the implications for monetary policy.
Governing Council had stated since the war in the Middle East began that they would look through the direct and immediate impact on inflation, but they would not let higher energy prices turn into broad‑based, persistent inflation. With the war in its eighth month and no resolution on the horizon, members exchanged views on whether a higher policy interest rate was needed to mitigate the risk that higher energy costs would spread to other goods and services.
The risk that higher energy prices could persist and rise further, discussed in previous Reports, had largely materialized and been embedded in the base‑case forecast in the October Report. A higher‑for‑longer oil price scenario comparable to the one outlined in the April Report had unfortunately come to pass.
Members noted that while core measures of inflation remained near 2%, cost pressures were building and would eventually be reflected in core measures as these costs make their way into consumer prices. Governing Council discussed the historical lags from costs to consumer prices and reflected on the Bank’s surveys in which businesses had reported that they anticipated passing on more of these cost increases to their customers. Members shared a diversity of views on the likely speed and extent of pass‑through. But they noted that even without this pass‑through, the energy shock alone would keep CPI inflation at around 3% for more than a year.
Downside risks to the inflation outlook had also diminished since the July Report. Economic activity was holding up relatively well in the face of trade uncertainty. Consumer spending was expected to remain steady, with strength in exports, business investment and fiscal measures contributing to a rebound in GDP growth in 2027. Members acknowledged that it was still too early to see how businesses would ultimately adapt to new US tariffs and continued trade policy uncertainty. Also, the labour market remained soft, with many indicators pointing to continued slack. Some members believed the labour market was stronger than the headline numbers indicated, given strength in private sector job creation.
Ultimately, Governing Council members agreed that the improved outlook for growth meant slack would be absorbed and would provide less of an offset to the cost pressures building in the economy.
Against this backdrop, members agreed that the risks had shifted: the prolonged energy shock and a resilient economy meant the risk that high inflation could persist and become broad‑based had increased.
Members underlined that their outlook was still subject to considerable uncertainty about the war in the Middle East, Canada‑US trade relations, global financial conditions, the speed and extent of pass‑through and how businesses and households would react to these developments. They agreed they would need to continue to take these sources of uncertainty into account when setting monetary policy.
Policy decision
Governing Council members deliberated two options: maintain the policy rate at 2.25% or raise the policy rate to 2.5%.
The main argument for holding the policy rate at 2.25% was that the rise in inflation had so far been concentrated in energy prices and in services that rely heavily on energy inputs, such as airfares. CPI inflation excluding gasoline was still 2.2%, and measures of core inflation remained close to 2%. In addition, members highlighted that while growth had been stronger than expected, some economic slack remained, and new US tariffs would weigh on growth. Businesses surveyed after the breakdown of Canada‑US trade negotiations indicated that sentiment had worsened.
The main argument for increasing the policy interest rate was that prices of gasoline, diesel and heating oil were considerably higher than in July and were expected to remain higher for longer. Cost pressures were building, and while businesses had so far mostly absorbed higher input costs, past experience and Bank surveys suggested that cost pass‑through would increase over the next year. The combination of higher energy prices and pass‑through had increased the risk of persistent, broad‑based inflation. And with the economy expected to be more resilient, there was less downward pressure on prices to offset these cost pressures.
After considering both options, Governing Council decided to raise the policy rate to 2.5% to reduce the risk that persistently high energy prices would lead to broader price increases in other goods and services and become persistent inflation.
Members agreed that while monetary policy cannot lower global energy prices, it can prevent them from leading to generalized inflation.
Governing Council also discussed the path forward for the policy interest rate. Members acknowledged there was considerable uncertainty, both about developments outside Canada and about their impacts in Canada. They recognized that uncertainty did not mean inaction, but they agreed they would need to proceed carefully to assess how economic developments would affect their outlook.
Governing Council members agreed there could be a need to increase the policy rate further, but given the uncertainty, they would take monetary policy decisions one meeting at a time with the benefit of the best available information.