Bank of Canada cautions further rate increases may be needed as energy costs prolong inflation

In an opening statement to the House of Commons Standing Committee on Finance, Bank of Canada Governor Tiff Macklem reviewed the recent policy rate increase and cautioned that further increases could be needed. The 25 basis point rise to 2.5%, the first since July 2023, responded to a deteriorating inflation outlook and a modest improvement in growth prospects. The increase aimed to reduce the risk that elevated energy prices would spread into broader inflation. Higher oil prices amid the continuing war in the Middle East, together with elevated refinery margins, are prolonging inflation pressures. Consumer price index inflation, around 3% since April, is projected to reach about 3.5% by the end of 2026 and remain at or above 3% through much of 2027 before returning close to the 2% target by the middle of 2028. Businesses have mostly absorbed higher input costs so far, but more of those costs are expected to reach consumer prices over the next year. An economic recovery would also reduce downward pressure on prices. Growth is expected to slow in the fourth quarter as new US tariffs weigh on activity, before recovering in 2027 with support from consumer spending, exports and business investment. Gross domestic product is projected to grow 1% in 2026 and about 2% in both 2027 and 2028. Future rate decisions will be taken one meeting at a time, with caution warranted by uncertainty over the Middle East, Canada-US trade relations and the extent to which energy costs feed into consumer prices.