Bank of Canada sees sharply higher inflation outlook as oil surges, Macklem says

The Bank of Canada anticipates a substantial increase in its quarterly inflation forecast due to the persistently high prices of crude oil and petroleum products, according to Governor Tiff Macklem. This forecast will influence the bank's rate decision scheduled for October 28. The ongoing conflict in the Middle East has resulted in limited oil shipments and damage to refinery capacity, which has heightened the risk of inflation becoming more persistent, Macklem informed journalists on a conference call from Bangkok.

The central bank's primary objective is to maintain its 2% inflation target and remains committed to keeping inflation close to this target over time, ready to adjust monetary policy as necessary. Although money market expectations of a rate hike have been growing recently, as of Saturday, markets had not anticipated any change for the October 28 meeting or the bank's last monetary policy decision in December.

Instead, they anticipate rate hikes of 100 basis points over the course of the next year. Despite the resilience shown by the global economy amidst the Middle East conflict and the Russia-Ukraine war, this resilience is being tested by higher costs and tighter financial conditions, according to Macklem. He emphasized that governments now have less fiscal room to maneuver and need to adjust their policies to rebuild capacity.

The central bank's primary concern is to determine whether higher oil and product prices will spread to the broader economy. Discussing the upcoming October 28 decision, Macklem stated that the question before them is whether inflation will naturally revert towards the target or if they must raise interest rates to guide inflation back to its target.