Bank of Canada governor warns high oil prices will push inflation forecast higher
Tiff Macklem said the conflict in the Middle East is driving up energy costs, complicating the central bank's path back to its two per cent inflation target.
BANGKOK — Bank of Canada Governor Tiff Macklem says persistently high global energy prices will force the central bank to raise its inflation forecast later this month.
Speaking to reporters on Saturday from the International Monetary Fund meetings in Bangkok, Macklem said the conflict in the Middle East shows no sign of ending and is driving up oil prices.
“If oil prices stay around $100, we expect inflation to gradually drift up from where it is today: 3 per cent,” Macklem said.
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The Bank of Canada will release updated forecasts for the economy and inflation alongside its interest rate decision on Oct. 28.
Macklem said he expects that outlook for inflation will be “quite a bit higher” than it was in the central bank’s last forecast in July, which had inflation cooling to around 2.5 per cent in the second half of this year.
He pointed to the escalation of the Middle East conflict, with Houthi attacks on Saudi Arabia, damage to refining capacity and the closure of the Strait of Hormuz as reasons there is no relief in sight for global oil prices.
Brent crude is now trading at around US$110 a barrel, far higher than the US$75 average the bank projected for the third quarter in July.
“You can only release strategic energy, oil reserves so many times, but that has helped contain this energy price shock,” Macklem said, warning that such reserves are being depleted.
The central bank’s key question, he said, is whether inflation will return to its two per cent target on its own or if interest rate hikes will be needed.
“The question we’re going to be asking ourselves is, is inflation likely to come back down towards our target on its own, or are we going to have to raise interest rates to influence the path?” he said.
Statistics Canada will publish September inflation data on Monday, the last major piece of data before the Oct. 28 rate announcement.
Macklem said the key takeaway from the IMF meeting was that the global economy remains resilient in the face of multiple shocks, but that this resilience is increasingly “under strain.”
He warned that risks from high sovereign debt and the sustainability of the artificial intelligence boom are becoming more intertwined.
Despite global headwinds, Macklem expressed some confidence in Canada’s economy, saying relative stability in the Canadian dollar reflects external optimism.
“Canada is a well-governed, good partner. We’re starting to see some recovery and investment. Companies are adapting to the increased tariff uncertainty. And I think that confidence is reflected,” he said.
As of Friday, financial markets saw a roughly 35 per cent chance the bank would raise its benchmark rate by a quarter-point on Oct. 28, rising to 95 per cent for the following decision on Dec. 9.
The central bank has held its policy rate steady at 2.25 per cent for the past seven decisions.
Yadude Books reported in October that a diesel price surge is adding new inflation pressure beyond the oil shock, with economists warning it could force central banks to hike rates.
With files from The Canadian Press, BNN Bloomberg and The Globe and Mail