Bank of Canada hikes to 2.5% while the Fed holds
Two central banks met on the same day and made different choices. On October 28, 2026, the Bank of Canada raised its target for the overnight rate by 25 basis points to 2.5%. On the same day, the US Federal Reserve kept its target range at 3.75% to 4.00%, on a 10-2 vote with both dissenters wanting a hike.
Our pre-decision post laid out how a Canadian plan responds to the overnight rate. This one covers what the Bank actually said, what the Fed’s vote tells you, and what the move does and does not change.
What the Bank of Canada decided
The press release set the overnight rate target at 2.5%, the Bank Rate at 2.75% and the deposit rate at 2.45%. The reasoning, in the Bank’s words and numbers:
- Inflation is higher and more persistent. CPI inflation “has been around 3% since April” and is expected to rise to about 3½% by the end of the year. Excluding gasoline, inflation was 2.2% in September, and core measures remain close to 2%.
- Pass-through is building. The Bank says cost pressures are building and that surveys suggest cost pass-through will increase over the next year. Near-term inflation expectations have risen, while longer-term expectations remain well anchored.
- A higher inflation path. CPI inflation is projected to average 3% in 2027, a percentage point above the July projection, before returning to 2% in the middle of 2028.
- Growth held up. GDP grew 3.3% in the second quarter; the Bank expects about 1% growth in 2026 and 2% in 2027 and 2028. Unemployment has hovered around 6½%.
The forward guidance matters as much as the move. The Bank wrote that “there could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully.” That is a door left open, not a schedule. The next announcement is December 9, 2026, and the next Monetary Policy Report is January 27, 2027.
What the Fed’s hold tells you
The FOMC statement voted 10-2 to maintain the target range for the federal funds rate at 3¾ to 4 percent. The two dissenters, Lisa D. Cook and Beth M. Hammack, preferred to raise it by a quarter point.
Put the two decisions side by side:
| Bank of Canada | US Federal Reserve | |
|---|---|---|
| Decision date | Oct 28, 2026 | Oct 28, 2026 |
| Action | Raised 25 bp | Held |
| New level | 2.5% target | 3.75% to 4.00% range |
| Dissent | Not stated in the release | 2 for a hike |
In this episode, both banks cite energy-driven inflation and uncertainty. For a household with money and debt on both sides of the border, the point is that the direction of rates is not the same in both countries, even though the reasons overlap. The US effects of the Fed’s earlier move are in our Fed rate hike post.
Variable-rate debt: what a quarter point is worth
Prime rates are set by each lender, but they track the Bank’s target. The Bank’s published prime series still showed 4.45% on October 28, the day of the decision, so any change reflects each lender’s own announcement afterwards.
The arithmetic is simple. A 0.25 percentage point change is $250 a year of interest per $100,000 borrowed, on an interest-only basis:
| Balance | Extra interest per year, per 0.25 pt |
|---|---|
| $100,000 | $250 |
| $250,000 | $625 |
| $500,000 | $1,250 |
For a variable-rate mortgage the effect depends on the contract. Some adjust the payment with prime; others hold the payment and change how much of it goes to principal. For a HELOC kept as a standby reserve, the rate matters when you draw on it. Our guide on home equity and HELOCs in retirement covers both uses, and the mortgage payoff calculator shows what prepayments are worth at your actual rate.
The CRA prescribed rate: not a pass-through
A policy hike does not automatically raise the CRA prescribed interest rate. Under section 4301 of the Income Tax Regulations, it is the average yield on 3-month Government of Canada Treasury bills sold at auction in the first month of the preceding quarter, rounded up to the next whole percentage point.
For January to March 2027, that is October 2026’s auctions. The Bank of Canada’s data series shows:
| Auction date | 3-month T-bill average yield |
|---|---|
| October 6, 2026 | 2.41% |
| October 20, 2026 | 2.53% |
Both are above 2.00% and at or below 3.00%, so the round-up lands on 3%, the same as the current October to December quarter. This is our reading of the published formula, not the CRA’s announcement. The CRA’s prescribed rates page did not yet list a first-quarter 2027 figure when this was written, so check it for the official number.
Why a family cares: the prescribed rate is the benchmark for prescribed-rate loans between spouses. Under subsection 74.5(2) of the Income Tax Act, the attribution rules do not apply to a loan if interest is charged at no less than the lesser of the prescribed rate in effect when the loan was made and an arm’s-length rate, and each year’s interest is paid within 30 days after year-end. The test looks to the rate when the loan was made. Our guide on splitting savings between couples covers where this fits among income-splitting tools.
Bonds, GICs and the return you assume
The Bank noted that advanced-economy sovereign bond yields are higher and that equity and credit markets have been volatile. Starting yields matter for a retirement projection more than the overnight rate: a bond held to maturity earns roughly its purchase yield. The question for a plan is whether its return assumption still fits current yields and a higher inflation path. Our guide on retirement return assumptions walks through how to set both, and the Canadian retirement calculator lets you rerun your plan with a higher inflation figure to see the effect on spending power.
What to watch next
- Early to mid November: the CRA’s published prescribed rate for January to March 2027.
- December 9, 2026: the Bank of Canada’s next decision.
- January 27, 2027: the next Monetary Policy Report.
This post is educational and describes how the rules and rates work; it is not advice for any particular situation.