Oil-driven inflation risks: BoC’s Macklem signals further rate hikes

“further rate hikes may be needed”, Bank of Canada (BoC) Governor Tiff Macklem told the House of Commons Standing Committee on Finance on Tuesday. He said the Middle East war was keeping energy prices “higher for longer.”

3.5% is Macklem’s year-end CPI forecast. In his prepared remarks, he expects inflation to stay above the 3% threshold through 2027 before returning to near 2% by mid-2028. His GDP growth forecasts stand at 1% for 2026 and 2% for both 2027 and 2028.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Main points:

Inflation prospects have worsened as the continuing Middle East war drives global oil prices higher. Prices are expected to stay elevated for longer, raising petrol costs for Canadians and expenses for many businesses

Further interest rate increases may be necessary. With uncertainty elevated, however, decisions will be made at each meeting

3.5% CPI inflation is forecast by year-end, followed by readings at or above 3% for much of 2027 and a return to near 2% by mid-2028

3.3% GDP growth was recorded in Q2; the Q3 estimate is around 2%

Despite US trade actions, Canada’s economy remains resilient and its growth outlook has improved modestly

1% GDP growth is forecast for 2026, rising to approximately 2% in each of 2027 and 2028

New US tariffs are expected to curb growth in Q4, with a recovery anticipated in 2027

Consumer and business costs are being pushed up by higher oil prices and refinery margins. A greater inflation pass-through is expected over the next year

Macklem does not believe fiscal policy is hindering efforts to bring inflation down under current conditions

Canadian Dollar: Today’s Currency Moves

Against the listed major currencies, the Canadian Dollar (CAD) performed best against the Japanese Yen today. The table below sets out its percentage changes.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.00%	-0.04%	0.35%	0.02%	0.33%	0.04%	0.32%
EUR	-0.00%		-0.03%	0.34%	0.01%	0.33%	0.03%	0.32%
GBP	0.04%	0.03%		0.36%	0.05%	0.36%	0.07%	0.36%
JPY	-0.35%	-0.34%	-0.36%		-0.32%	-0.02%	-0.30%	-0.01%
CAD	-0.02%	-0.01%	-0.05%	0.32%		0.32%	0.03%	0.31%
AUD	-0.33%	-0.33%	-0.36%	0.02%	-0.32%		-0.28%	0.00%
NZD	-0.04%	-0.03%	-0.07%	0.30%	-0.03%	0.28%		0.29%
CHF	-0.32%	-0.32%	-0.36%	0.01%	-0.31%	0.00%	-0.29%

Percentage movements between the major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. For instance, choosing the Canadian Dollar on the left and following that row across to the US Dollar gives the percentage change for CAD (base)/USD (quote).

Bank of Canada: Key Questions Answered

Bank of Canada: Its Role and Impact on the Canadian Dollar

From its base in Ottawa, the Bank of Canada (BoC) manages Canada’s monetary policy and sets interest rates. Policy is decided at eight scheduled meetings each year, supplemented by emergency meetings when necessary. Maintaining price stability is the BoC’s primary mandate, with inflation kept within a 1-3% range. Interest rate increases and cuts are its principal tools for meeting that objective. Higher relative interest rates generally support a stronger Canadian Dollar (CAD), while lower relative rates tend to have the opposite effect. Quantitative easing and quantitative tightening are also part of its toolkit.

Quantitative Easing (QE): How It Affects the Canadian Dollar

When rate cuts alone are unlikely to deliver price stability, the Bank of Canada can turn to Quantitative Easing (QE) as a last resort in extreme circumstances. Under QE, the BoC prints Canadian Dollars to purchase assets from financial institutions, usually government or corporate bonds. The policy typically weakens CAD. During the Great Financial Crisis of 2009-11, the Bank of Canada deployed QE after banks lost confidence in one another’s capacity to repay debts and credit markets froze.

Quantitative Tightening (QT): Its Impact on the Canadian Dollar

Once an economic recovery takes hold after QE and inflation begins to climb, quantitative tightening (QT) reverses the earlier easing. Under QE, the Bank of Canada buys government and corporate bonds from financial institutions to supply liquidity. QT instead sees the BoC halt further asset purchases and cease reinvesting principal as bonds in its existing portfolio mature. This is generally supportive, or bullish, for the Canadian Dollar.