Macklem defends rate increase as energy costs prolong inflation
Bank of Canada Governor Tiff Macklem defended a 25-basis-point policy rate increase to 2.5 percent before the House of Commons finance committee. He cited higher inflation risks from energy costs and a more resilient economy.
Energy costs extend inflation pressure
Appearing with Senior Deputy Governor Carolyn Rogers, Macklem explained the previous week's first rate increase since July 2023.
The inflation outlook had deteriorated since the July Monetary Policy Report as war in the Middle East sustained higher oil prices.
Elevated refinery margins also contributed: CPI inflation has been around 3 percent since April and is projected to reach about 3.5 percent by end-2026.
It remains at or above 3 percent through much of 2027, returning close to the 2 percent target by mid-2028.
Gasoline, diesel and heating oil raise household and business costs.
Firms have mostly absorbed higher input costs, but surveys and past experience point to greater pass-through over the next year.
The increase aims to prevent generalized inflation.
Recovery faces another tariff setback
GDP grew 3.3 percent in Q2 2026; indicators point to about 2 percent in Q3. Consumer spending was solid, exports and business investment rebounded, and unemployment remained around 6.5 percent for several months.
Some excess supply persists.
New US tariffs are projected to slow Q4 growth.
The Bank forecasts 1 percent growth in 2026 and about 2 percent in both 2027 and 2028.
Consumer spending, exports and business investment supported by fiscal measures underpin the recovery; government investment also supports the improved outlook.
Further tightening remains possible
Governing Council judged inflation risks higher and the scope for monetary accommodation smaller as recovery reduces downward price pressure.
Further rate increases remain possible, with decisions taken one meeting at a time.
Middle East developments, Canada-US trade relations and energy pass-through remain uncertain.