Bank of Canada Sees Elevated Inflation Risks Amid High Gas Prices

The Bank of Canada's governing council saw elevated inflation risks at their September meeting, according to minutes released Wednesday. The central bank maintained its benchmark rate at 2.25% on September 2, but Governor Tiff Macklem indicated that policymakers were ready to increase borrowing costs multiple times if inflation remained too high.

The council cited persistently high gasoline prices, noting that conflict in Iran had raised market expectations for oil prices. They saw a higher risk of inflation spreading to non-energy goods and services across Canada, despite finding little evidence that elevated gasoline prices were passing through broadly to other goods and services.

The council concluded that heightened tensions in the Middle East, protracted conflict, and damage to refining capacity would keep gasoline and diesel prices high, pushing headline inflation higher for longer than the bank's July forecast. Trade actions on both sides of the U.S. border would also add to business costs, which could eventually be passed on to consumers and impact inflation.

The rate-setting team said that if higher energy prices spilled over into other components of the consumer price index, a monetary policy response would be needed to prevent inflation from setting in. The council acknowledged that incoming data since the central bank's July monetary policy report showed the economy and inflation had largely evolved in line with expectations.