Bank of Canada governor Tiff Macklem says he expects inflation to rise if oil prices remain at current levels, vowing that the bank will not be “too slow” to raise interest rates in response.
During a speech in Halifax on Monday, the governor warned that the ongoing conflict in the Middle East and the trade war’s escalation have raised the risk that inflation — which is currently above the bank’s two per cent target — becomes broader and more persistent.
Meanwhile, if the tariffs remain in place, economic growth could be roughly halved in the fourth quarter, added Macklem.
“We don’t want to raise our policy rate and restrain growth if inflationary pressures are contained,” he said. “But nor do we want to be too slow to respond if inflationary pressures are becoming more persistent.”
The governor had already warned about higher inflation risks when policymakers decided to keep the policy rate unchanged earlier this month.
Since then, the bank has maintained a hawkish tone, leading analysts to rethink their predictions for future rate moves, with a potential hike happening sooner than previously expected.
“If oil prices are north of $100 a barrel at the time of the next rate decision and the upcoming (inflation) report shows more passthrough from high energy prices, the Bank of Canada could raise rates in October,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients following Macklem’s speech.
Desjardins’ prediction is that oil prices will come down, Mendes added, and his official forecast continues to expect a rate hike only in the first quarter of 2027.
This is a developing story.
