Bank of Canada signals sharply higher inflation forecast amid oil price surge
Governor Macklem said the BoC will raise its quarterly inflation forecast significantly at its October 28 rate decision, citing persistent crude oil and petroleum product price increases tied to Middle East conflict and refinery capacity damage.
What happened
Bank of Canada Governor Tiff Macklem announced on October 17 that the central bank expects to raise its quarterly inflation forecast substantially this month due to persistently elevated crude oil and petroleum product prices. He attributed the pressure to the ongoing Middle East conflict, continued shipment curtailments, and refinery capacity damage. Macklem stated that the risk of inflation broadening and becoming more persistent has increased. The BoC's updated inflation and growth forecasts will inform its monetary policy decision on October 28. As of Saturday, money markets were not pricing in a rate change on October 28 or at the December decision, though they were pricing in 100 basis points of increases over the course of next year.
Context
The central bank faces a key question about whether higher oil-driven inflation will spill over into the broader economy or recede on its own. This uncertainty will determine whether the BoC needs to raise interest rates to guide inflation back to its 2% target. Macklem noted that the global economy has shown resilience despite the Middle East conflict and Russia-Ukraine war, but that resilience is being tested by higher costs and tighter financial conditions. He also observed that governments have less fiscal room to maneuver and need to rebuild policy capacity. The inflation pressure arrives as the BoC weighs the trade-off between anchoring price expectations and managing broader economic risks.