In opening remarks to the Standing Senate Committee on Banking, Commerce and the Economy, Bank of Canada Governor Tiff Macklem reviewed the recent policy interest rate increase of 25 basis points to 2.5%, the first increase since July 2023. A substantially higher inflation outlook and a modest improvement in growth had reduced the scope for monetary accommodation. The increase sought to limit the risk that elevated energy prices would spread into broader inflation. The war in the Middle East has pushed oil prices higher, while elevated refinery margins have added to fuel costs. Consumer price index inflation has been around 3% since April and is projected to rise to about 3.5% by the end of 2026. It is expected to remain at or above 3% through much of 2027 before returning close to the 2% target by the middle of 2028. Businesses have largely absorbed higher input costs, but cost pass-through is expected to increase 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 U.S. tariffs weigh on activity, then strengthen in 2027 as consumption, exports and business investment support recovery. Gross domestic product is projected to grow by 1% in 2026 and about 2% in both 2027 and 2028. Further rate increases could be needed, but Governing Council will decide one meeting at a time and proceed carefully given uncertainty over the Middle East, Canada-U.S. trade relations and the transmission of energy costs to consumer prices.

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