Bank of Canada Signals Higher Inflation Forecast Amid Surging Oil Prices
Governor Tiff Macklem expects the Bank of Canada to revise its inflation forecast upward as Brent crude trades near US$110, far above July projections. With Canadian headline inflation at 3 per cent and global energy disruptions intensifying, financial markets are pricing in a high probability of interest rate hikes by December.
Bank of Canada Governor Tiff Macklem stated that the central bank expects to revise its inflation forecast higher at its upcoming rate announcement, driven by persistently elevated global oil prices and ongoing conflict in the Middle East.
Speaking to reporters on Saturday morning from the International Monetary Fund meeting in Bangkok, Thailand, Macklem highlighted the sharp divergence between current energy costs and the bank's earlier projections. Brent crude is currently trading at around US$110, while West Texas Intermediate sits at US$101. In its July quarterly forecast, the Bank of Canada had expected Brent crude to average around US$75 in the third quarter.
Macklem noted that if oil prices remain near the US$100 threshold, inflation is expected to gradually drift up from the current 3 per cent level recorded in August. Returning inflation to the bank's 2 per cent target could necessitate interest rate increases. The Bank of Canada has held its benchmark interest rate steady at 2.25 per cent for the past seven rate decisions. At the September announcement, Macklem identified oil-driven inflation risks as the institution's main concern.
The pressure on Canadian monetary policy contrasts with actions already taken by other major central banks. The U.S. Federal Reserve and the European Central Bank have begun raising interest rates in response to the energy price shock.
Several geopolitical factors are escalating uncertainty in global energy markets. Macklem cited the lack of resolution in the Middle East conflict and Houthi attacks on Saudi Arabia as key drivers. Additionally, refined petroleum products such as diesel and gasoline have become more expensive due to the closure of the Strait of Hormuz to tanker traffic and damage to refineries in Russia and Ukraine.
Macklem also warned that strategic oil reserves worldwide are being depleted, noting that China is reducing its large reserves, which limits the ability to contain future energy price shocks.
Statistics Canada is scheduled to publish September inflation data alongside the central bank's quarterly business and consumer surveys on Monday. The Bank of Canada's next interest rate announcement is set for Oct. 28. Financial markets currently assign a roughly 35-per-cent probability to a quarter-point rate hike at that meeting. Market expectations for a rate hike rise significantly to 95 per cent for the subsequent decision on Dec. 9.