The Bank of Canada is poised to raise its benchmark interest rate for the first time in three years on Wednesday, aiming to curb inflation fueled by soaring oil prices. Governor Tiff Macklem has highlighted the inflation risks tied to high energy costs, which have pushed financial markets to anticipate a rate hike. The central bank has kept rates steady at 2.25 per cent since last October, balancing concerns over the trade war with the U.S. and the global energy shock from the Middle East conflict.
Analysts are divided on the decision, with some arguing that a rate hike could be premature given the current economic conditions. The housing market is struggling, unemployment remains high, and the U.S. has threatened new tariffs on Canadian autos. Avery Shenfeld of Canadian Imperial Bank of Commerce noted that a rate hike could backfire if oil prices drop or trade tensions escalate.
Markets have rapidly shifted expectations, now pricing in a nearly 90 per cent chance of a quarter-point hike this week, up from 35 per cent just days ago. This shift followed Macklem’s hawkish remarks at the International Monetary Fund meeting in Bangkok, where he warned that oil prices around US$100 could push inflation higher. Brent Crude hit a six-month high of US$116 on Friday, while West Texas Intermediate traded at US$103.
Despite Macklem’s focus on oil, recent data shows inflation remains contained, with the consumer price index at 3.1 per cent in September. Excluding energy, inflation actually eased to 2.2 per cent. Jeremy Kronick of the C.D. Howe Institute argued that the data does not justify a hike, suggesting markets may be overreacting to Macklem’s comments. However, the bank’s consumer survey showed rising inflation expectations, which could influence the decision.