The Bank of Canada raised its target for the overnight rate by 25 basis points to 2.5% on 28 October, with the Bank Rate at 2.75% and the deposit rate at 2.45%. It was the bank’s first increase since July 2023, according to its own policy-rate series. Governing Council said it acted “to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services”, and added: “There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully.”
A day later the European Central Bank kept its three key rates unchanged, leaving the deposit facility rate at 2.50%, the main refinancing rate at 2.65% and the marginal lending rate at 2.90%. That followed increases decided on 11 June and 10 September. Christine Lagarde, the ECB’s president, said that “the Governing Council debated whether a hike was appropriate” before deciding unanimously to wait for more data. Asked why a December rise should be in doubt, the president said that, barring “a major development”, “the direction of travel is quite clear for all of us.”
Tightening into a supply shock
Both banks face the same problem: an energy shock that lifts headline inflation while underlying measures stay close to target. In Canada, CPI inflation has been around 3% since April and is expected to rise to about 3½% by the end of the year, yet inflation excluding gasoline was 2.2% in September and core measures “remain close to 2%”. The bank noted: “The conflict in the Middle East is now in its eighth month and there is no clear path to resolution.” It expects CPI inflation to average 3% in 2027 and to come down to 2% in the middle of 2028.
In the euro area, inflation rose to 3.8% in September from 3.2% in August, with energy inflation at 18.9%. The ECB said underlying inflation “has remained broadly stable so far and wages do not show a material response at this stage”. Markets have also tightened on its behalf: average 10-year sovereign yields had risen by “around 35 basis points” since the cut-off for the September staff projections, the president said. Eurostat’s preliminary flash estimate on 30 October showed euro-area GDP up 0.4% in the third quarter.
What it means for pension portfolios
For defined-benefit plans in both regions, higher long-term yields lower the present value of liabilities. Canada’s 10-year benchmark bond yield was 3.87% on 28 October, according to Bank of Canada data, and euro-area 10-year yields are up about 35 basis points since September. Plans not fully hedged against interest rates should, other things being equal, see funded positions improve.
Other things are rarely equal. Raising rates into a supply shock squeezes growth at the moment energy costs squeeze real incomes. The ECB said the shock poses “downside risks to the growth outlook”, and reported that credit standards for loans to firms tightened in the third quarter. That matters for private credit, where floating-rate borrowers pay more as policy rates rise, and for energy-exposed European equities and infrastructure. Plans whose benefits are indexed to prices face a further cost, because a shock that lifts consumer prices also lifts indexed liabilities. Liquidity matters too: if growth assets fall while rate hedges demand collateral, funds can become forced sellers.
The opposing argument is strong. Core inflation is close to 2% in Canada and broadly stable in the euro area, and, in the euro area, wages have not yet shown a material response. If energy prices fall, tightening now could prove a mistake that pension portfolios pay for twice: through weaker growth assets, and through lower yields that push liabilities back up. The ECB itself said higher long-term financing costs “have qualified the magnitude” of the energy-driven rise in inflation, which suggests bond markets may already be doing part of its work.
What to watch
- 13 November: Eurostat’s next flash estimate of third-quarter GDP.
- 9 December: the Bank of Canada’s next rate announcement; its next Monetary Policy Report follows on 27 January 2027.
- 17 December: the ECB’s next decision, which the president said will be a “projection exercise”.
- 7 February 2027: Christine Lagarde steps down as ECB president, after the February monetary policy meeting.
Sources
- Bank of Canada raises the policy rate by 25 basis points to 2½%, Bank of Canada, 28 October 2026
- Target for the overnight rate (business daily), series V39079, Bank of Canada, 29 October 2026
- Benchmark bond yield, 10-year, series BD.CDN.10YR.DQ.YLD, Bank of Canada, 29 October 2026
- Monetary policy decisions, European Central Bank, 29 October 2026
- Christine Lagarde, Boris Vujčić: Monetary policy statement (with Q&A), European Central Bank, 29 October 2026
- Official interest rates, European Central Bank, 29 October 2026
- Meetings of the Governing Council and the General Council, European Central Bank, 29 October 2026
- ECB President Lagarde to step down on 7 February 2027, European Central Bank, 29 October 2026
- GDP up by 0.4% in the euro area and by 0.5% in the EU, Eurostat, 30 October 2026