Bank of Canada Governor Tiff Macklem is warning that persistently high global energy prices will drive up the outlook for inflation at home. Speaking from an International Monetary Fund meeting in Bangkok, Macklem noted that while the global economy has performed better than expected, international resilience is increasingly under strain.

Why is inflation rising?

Macklem indicated that the outlook for inflation will likely be "quite a bit higher" than the central bank's July forecast. That previous projection suggested inflation would cool to approximately 2.5 per cent in the second half of the year. Current pressures include:

  • Ongoing wars in Iran and Ukraine
  • Trade disruptions and rising bond yields
  • Houthi attacks on Saudi Arabia
  • Damage to refining capacity in the Gulf region
  • The closure of the Strait of Hormuz

These factors contribute to higher costs for gasoline, diesel, and heating oil for Canadians.

Will interest rates increase?

The central bank is mandated to maintain inflation at a two per cent target, but domestic inflation has remained at three per cent for two consecutive months. Macklem signaled that the bank is prepared to react to spreading price pressures.

"The question we're going to be asking ourselves is, is inflation likely to come back down towards our target on its own, or are we going to have to raise interest rates to influence the path?" Macklem said. The bank will release updated economic forecasts alongside its next interest rate decision on Oct. 28.

Global economic resilience under strain

While expressing concern over energy shocks, Macklem noted that the global economy has shown strength despite high borrowing costs. However, he cautioned that certain buffers, such as the release of strategic oil reserves, are being depleted. He remains confident in Canada's ability to weather these global challenges due to ongoing investment and adaptation by domestic companies.

FAQ

What is the current inflation rate in Canada?

Inflation in Canada has held steady at three per cent for two months in a row.

When is the next Bank of Canada interest rate decision?

The central bank is scheduled to release its next interest rate decision on Oct. 28.