Further rate hikes signalled by BoC’s Macklem as oil heightens inflation risks

Energy prices are staying “higher for longer” as a result of the war in the Middle East, Bank of Canada (BoC) Governor Tiff Macklem told the House of Commons Standing Committee on Finance on Tuesday. Appearing before the committee, he said that “further rate hikes may be needed”.

CPI is expected to climb to 3.5% by the end of the year, according to his prepared remarks, before staying above the 3% threshold through 2027 and returning to around 2% by mid-2028. His GDP growth forecasts stand at 1% for 2026 and 2% for 2027 and 2028.

Macklem outlines inflation and growth prospects:

Persisting conflict in the Middle East has pushed up global oil prices, which are expected to stay elevated for longer, worsening the inflation outlook. Canadians are feeling the impact at the petrol pump, while many businesses face higher costs

Amid heightened uncertainty, decisions will be made at each meeting, although further interest rate increases may be necessary

By year-end, CPI inflation is forecast to reach 3.5%, then hold at or above 3% for much of 2027 before moving back towards 2% by mid-2028

Following GDP growth of 3.3% in Q2, the estimate for Q3 is around 2%

Despite US trade actions, the Canadian economy remains resilient and its growth prospects have improved modestly

Forecasts put GDP growth at 1% for 2026, followed by approximately 2% in both 2027 and 2028

New US tariffs are expected to weigh on growth in Q4, ahead of a recovery in 2027

Consumer and business costs are being pushed up by higher oil prices and refinery margins, with a greater impact on inflation expected as these costs feed through over the coming year

In his view, fiscal policy is not making it more difficult to bring inflation down under current circumstances