The Bank of Canada raised its policy rate by a quarter point to 2.5% on October 28, 2026, its first increase since July 2023, and said more hikes are possible. For owners, the quarter point is not the real story. The Bank now expects inflation to stay near 3% through 2027, and that changes how you should carry financing, escalation and contract risk on every project still in planning or procurement.
What happened
The Bank had held its overnight rate target at 2.25% for seven straight decisions after its October 2025 cut. On October 28 it moved it up to 2.5%, with the Bank Rate at 2.75% and the deposit rate at 2.45%.
The driver is energy. Energy prices were up 19.0% year over year in September and gasoline 27.8%, pushing headline CPI to 3.1%. Excluding gasoline, inflation was 2.2%, and core measures remain close to 2%. The Bank’s worry is that high energy costs spread into other goods and services, so it moved early.
View the data
| Decision date | Policy rate (%) |
|---|---|
| Apr 16, 2025 | 2.75 |
| Jun 4, 2025 | 2.75 |
| Jul 30, 2025 | 2.75 |
| Sep 17, 2025 | 2.50 |
| Oct 29, 2025 | 2.25 |
| Dec 10, 2025 | 2.25 |
| Jan 28, 2026 | 2.25 |
| Mar 18, 2026 | 2.25 |
| Apr 29, 2026 | 2.25 |
| Jun 10, 2026 | 2.25 |
| Jul 15, 2026 | 2.25 |
| Sep 2, 2026 | 2.25 |
| Oct 28, 2026 | 2.50 |
The new projections matter more than the decision itself. The Bank expects CPI inflation of about 3.5% by the end of 2026, an average of 3% in 2027 (a full point above its July projection) and a return to 2% only in mid-2028. It sees growth of 1% in 2026 and 2% in 2027 and 2028, supported by business investment and government spending, with unemployment around 6.5% and the dollar near 71 cents US. Its guidance was blunt: “There could be a need to increase the policy rate further.” The next decision is December 9, 2026. TD Economics expects one more quarter-point hike in the first quarter of 2027, to 2.75%.
What it means for owners
Financing costs have turned up, not down. Lenders’ prime rates are expected to follow the hike, so prime-linked construction loans and variable facilities reprice right away. As a simple illustration, on a facility averaging $20 million drawn over a year, an extra 0.25% is about $50,000 of interest. That alone won’t sink a project. The real problem is that many pro formas built in 2025 assumed rates would keep falling. That assumption is gone, and if the market is right about another hike, the carry rises twice within a few months.
Escalation will not drift back to 2% on its own. The Bank’s own forecast has inflation at about 3% through 2027. Energy feeds construction directly: diesel for equipment and trucking, asphalt, and energy-heavy materials such as steel, cement and glass. A 71-cent dollar adds to the cost of imported equipment. If your escalation allowance for 2027 tender dates still uses 2%, it is probably light.
View the data
| Period | CPI inflation (%) | Type |
|---|---|---|
| Sep 2026 | 3.1 | Actual |
| End of 2026 | about 3.5 | Projection |
| 2027 average | 3.0 | Projection |
| Mid-2028 | 2.0 | Projection |
Contractors will price the risk, one way or another. Expect more requests for fuel adjustment and index-based escalation clauses on 2027 work. If you refuse them, the risk does not disappear; it shows up as a higher fixed price or a thinner bid list. The better question is which risks you want to share, and on what index, threshold and cap.
This is not a boom signal. Here is the contrarian point. The Bank is hiking into a soft economy, with 1% growth this year and unemployment near 6.5%. Input costs can rise while some tender markets stay competitive. That combination squeezes trade margins, which is when subcontractor failures and aggressive change order pricing tend to show up. Watch the financial health of your supply chain, not just the price on the bid form.
Waiting for cheaper money is no longer a safe default. Deferring a start in the hope of lower rates now means paying roughly 3% a year in escalation while rates may rise anyway. Every deferral should be a costed decision, not a reflex.
What to do now
- Re-run the financing carry. Update interest on every active and planned project at today’s rate, plus a sensitivity at 50 basis points higher. Show the board the range, not a single number.
- Reset escalation allowances. Move 2027 assumptions closer to 3% and tie them to a published index. Statistics Canada’s third-quarter Building Construction Price Index is scheduled for October 29, with revisions to the first two quarters of 2026, so rebase against the revised series. Our escalation allowance guide shows the method.
- Set your escalation clause policy before tenders go out. Decide which materials and fuels qualify, the index, the threshold and the cap. See construction price escalation clauses.
- Lock long-lead and imported equipment earlier. Switchgear, transformers, elevators and rooftop units carry both currency and energy exposure. Earlier pricing and owner pre-purchase can take both off the table.
- Put December 9 and January 27 on the capital committee calendar. Agree in advance what rate or escalation level would trigger a re-forecast, a scope review or a change in procurement timing.
FAQ
What did the Bank of Canada do on October 28, 2026?
It raised the policy rate by 25 basis points to 2.5%, its first increase since July 2023, after holding at 2.25% for seven decisions. It said further increases could be needed, and the next decision is December 9, 2026.
How does the rate hike affect construction projects?
Prime-linked construction loans reprice upward, and the Bank now projects inflation of about 3% through 2027, so escalation allowances built on 2% are likely too low. Contractors are also likely to ask for fuel and escalation clauses on 2027 work.
The bottom line
A quarter point is manageable. A budget built on falling rates and 2% inflation is not. Owners who re-baseline carry and escalation now will make cleaner decisions than those who wait for December. Want a second look at your project’s financing and escalation assumptions? Book a 30-minute call, or check the latest figures in our GTA Construction Cost Monitor.
Sources: Bank of Canada, Bank of Canada raises the policy rate by 25 basis points to 2½% (October 28, 2026); Bank of Canada, policy interest rate history; TD Economics, Bank of Canada interest rate announcement (October 28, 2026); MoneySense, Bank of Canada raises interest rate to 2.5% (October 28, 2026); Statistics Canada, Building construction price indexes: announcement (October 21, 2026). Cover photo: Trista Le on Unsplash (Unsplash Licence). The financing figure is an illustrative calculation, not a forecast.