Further policy rate increases could be needed, Macklem says

Governor Tiff Macklem of the Bank of Canada delivered the following assessment:

• Further policy rate increases may be required.
• The central bank will move carefully given the uncertainties.
• Decisions will be made meeting by meeting.
• The inflation outlook has worsened.
• A rate increase is needed to reduce the risk that high energy prices become widespread inflation.
• There is less capacity for monetary accommodation.
• Cost pass-through is forecast to rise over the next twelve months.
• The growth picture has improved slightly despite US trade measures.
• Growth is likely to slow in Q4 under the burden of new US tariffs.
• The CPI is seen rising to about 3.5% by year-end.
• Inflation is expected to remain at or above 3% for most of 2027.
• Indicators still point to some excess supply in the economy.
• Uncertainty about the Middle East and Canada-US trade continues to be high.

Most of these remarks came after the Bank of Canada's policy meeting. Macklem did not address some recent weak readings in Canadian economic data, though he could be pressed on that. The market is divided, pricing in a 56% chance of a hike at the December meeting and about 75 basis points of tightening over the coming year.

In his opening statement, Macklem left the door open for further tightening, saying there “could be a need to raise the policy rate further” after last week's 25-bp increase to 2.50%, the first hike since July 2023. He tempered that by vowing to proceed carefully and take decisions one meeting at a time.

The case centers on oil. Sustained high crude and refinery margins have kept the CPI near 3% since April, and the central bank sees it climbing to about 3.5% by year-end and staying at or above 3% through much of 2027. Macklem cited rising cost pass-through from businesses and an economic pickup as grounds for a more entrenched energy shock. Growth is expected to dip in Q4 due to new US tariffs before rebounding to about 2% in 2027-28. He also pointed to some excess supply in the economy, giving the tone a hawkish yet cautious feel rather than a commitment to a rate-hiking cycle.