Bank of Canada Signals Hawkish Stance Amid Elevated Energy Prices

Bank of Canada Governor Tiff Macklem has signaled a hawkish stance on interest rates, warning that policymakers would not want to move too slowly in raising borrowing costs if inflationary pressures prove more persistent.

The Middle East conflict has driven up energy prices, increasing the risk of elevated inflation in Canada, and monetary policy may need to respond accordingly. According to Macklem, the Bank of Canada does not wish to raise rates while inflation is under control but also does not want to be too slow if pressures prove more persistent.

The Bank kept its policy rate unchanged at 2.25% on September 2, emphasizing that the conflict has kept energy prices high, thereby increasing upside risks to the inflation outlook. Canada's Consumer Price Index (CPI) year-on-year increase has remained around 3%, largely driven by rising gasoline prices.

The Bank expects overall inflation to edge up further in the coming months if oil prices stay near $100 per barrel. For now, signs of high energy prices spilling over into other goods and services remain limited, but the Bank is growing increasingly concerned that energy costs will eventually be passed on to a broader range of consumer prices.