Bank of Canada Governor Tiff Macklem stated on Friday that while the central bank has not yet increased interest rates, prolonged periods of elevated energy prices could make future hikes more difficult. Speaking at the IMF and World Bank annual meetings in Bangkok, Macklem noted that officials have been monitoring these price increases closely.

How do energy prices affect policy?

Macklem indicated that the central bank has attempted to look through the current rise in energy costs. However, he cautioned that the situation is changing. "We’ve been looking through the increase in energy prices, but the longer this goes, the harder that gets," Macklem said during a panel discussion.

High energy costs can exert inflationary pressure, making it more challenging for the bank to maintain its target inflation range of 1% to 3%. While the current policy rate remains at 2.25%, persistent energy-driven inflation remains a significant variable for the Governing Council.

Current economic pressures

The Bank of Canada is navigating a complex economic environment where several factors are testing the case for rate hikes. While energy prices drive inflation, other indicators suggest caution. For instance, recent data showed back-to-back monthly job losses, which has caused some market participants to doubt the necessity of an immediate rate increase.

Additionally, the following factors are influencing the Canadian economic outlook:

  • Energy Markets: Crude oil is Canada's largest export, meaning price shifts impact both inflation and the currency.
  • Employment Data: Recent monthly job losses have influenced market expectations regarding immediate rate changes.
  • Trade Factors: New US tariffs and the general health of the U.S. economy continue to drive market volatility.

As oil prices remain well-supported due to supply concerns, the Bank must balance the inflationary risks of high energy costs against the weakening growth outlook caused by employment trends.

FAQ

Has the Bank of Canada raised rates recently?

No, the policy rate has remained at 2.25% since a quarter-point cut in October 2025.

When is the next interest rate decision?

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