Bank of Canada Governor hints back‑to‑back hikes are on the table if oil keeps biting
“Consecutive increases” in interest rates are now on the table at the Bank of Canada if the current energy shock turns into broader price pressures — a clear warning sign for anyone managing long‑term liabilities.
Governor Tiff Macklem said that if high oil prices keep feeding broad‑based inflation, the Bank of Canada may need consecutive rate hikes and that monetary policy “will have more work to do.”
According to Reuters, He framed this as a risk scenario tied to the war in Iran and US tariffs, which he said create complex forces that push some prices up and others down.
For now, the Bank of Canada kept its benchmark rate at 2.25 percent in a fourth consecutive decision.
Macklem said that if the economy and oil prices follow the bank’s forecast, the current stance is likely appropriate and the central bank can keep rates “close to the policy rate that we have today.”
The Canadian Press reports the inflation profile sits at the core of that call. Inflation stood at 2.4 percent in March as higher global oil prices hit gas pumps and food inflation stayed stubborn.
The Bank of Canada’s baseline forecast calls for inflation to jump to about 3 percent in April and average around 2.3 percent this year, before returning to the two percent target in early 2027.
According to Reuters, the bank assumes oil prices will ease to about US$75 a barrel by mid‑2027 and that US tariffs remain unchanged,
Macklem said there is “little evidence” so far that higher oil prices have pushed up other prices, despite rising near‑term inflation expectations.
He warned expectations may be “not as well anchored as they were before COVID,” recalling the anger when inflation hit 8.1 percent.
The Governing Council plans to watch those expectations closely.
Macklem described the current backdrop as “a more shock‑prone world,” citing the energy price spike from the war in Iran and the looming review of the Canada‑US‑Mexico trade agreement as key risks to the outlook, according to The Canadian Press.
Depending on how those shocks evolve, he said the policy rate might need to move higher, lower or stay put for some time.
At the same time, a debate is emerging over how the central bank is reading the “neutral” rate.
The Financial Post reported that Desjardins Group economist Royce Mendes believes Macklem and US Federal Reserve chair nominee Kevin Warsh are misinterpreting the effect of productivity on the economy and, by extension, on where interest rates should sit.
Canada’s neutral rate – the level that neither stimulates nor restrains growth – currently ranges from 2.25 percent to 3.25 percent.
According to Mendes, policymakers lean on a long‑term neutral rate that does little to guide today’s decisions because it “looks through” major shocks, including the US tariff war, weak business investment, soft productivity, and slower population growth.
He argued that these conditions point to a short‑run neutral rate below the long‑run estimate.
The Financial Post said the war in Iran has also raised inflation expectations and forced the Bank of Canada to juggle economic support with inflation control, putting it “in a tough position,”
Macklem, for his part, continues to stress the bank’s mandate to keep inflation anchored at two percent and present the Bank of Canada as “a source of stability” that “will bring inflation back to target,” according to The Canadian Press.
