The Bank of Canada expects to significantly increase its quarterly inflation forecast this month due to persistently high prices for crude oil and petroleum products. Governor Tiff Macklem announced the outlook on Saturday, noting that energy costs are a primary driver of economic uncertainty.

Why is the inflation outlook rising?

According to Macklem, several geopolitical and logistical factors are contributing to the increased risk of persistent inflation. During a conference call from Bangkok, he cited the following concerns:

  • Ongoing conflict in the Middle East
  • Curtailed shipments
  • Damage to refinery capacity

Macklem stated that these factors increase the risk that inflation could broaden across the economy. The bank remains committed to its 2% inflation target and is prepared to adjust monetary policy as necessary to maintain it.

Will interest rates change soon?

New quarterly growth and inflation forecasts will be used to inform the bank's next interest rate decision on October 28. While money markets are currently not pricing in any rate changes for the October or December meetings, expectations for future movement are growing. Specifically, markets are pricing in total increases of 100 basis points over the course of next year.

Central bankers are currently focused on determining if higher energy costs will spill over into the broader economy. Macklem noted that the bank must decide if inflation will return to the target on its own or if interest rates must be raised to "nudge the path" back toward the goal.

Global economic resilience

Despite conflicts in the Middle East and the Russia-Ukraine war, Macklem observed that the global economy has shown resilience. However, this strength is being tested by tighter financial conditions and rising costs. He also mentioned that governments have less fiscal room to maneuver and may need to adjust policies to rebuild capacity.

FAQ

When is the next interest rate decision?

The Bank of Canada is scheduled to make its next rate decision on October 28.

What is the Bank of Canada's inflation target?

The central bank's primary goal is to keep inflation close to a 2% target over time.