Bank of Canada head warns he may have to hike rates if oil prices remain high - Toronto Star

The Bank of Canada governor said during a speech in Halifax on Monday that the ongoing Middle East conflict and the trade war's escalation have raised the risk that inflation could become more persistent. 

Bank of Canada Governor Tiff Macklem is seen during a news conference in Ottawa last June.

Bank of Canada governor Tiff Macklem says he expects inflation to rise if oil prices remain at current levels, vowing that the bank will not be “too slow” to raise interest rates if needed.

During a speech in Halifax on Monday, the governor warned that the ongoing conflict in the Middle East and the trade war’s escalation have raised the risk that inflation — which is currently above the bank’s two per cent target — becomes broader and stubborn. 

“We don’t want to raise our policy rate and restrain growth if inflationary pressures are contained,” he said. “But nor do we want to be too slow to respond if inflationary pressures are becoming more persistent.” 

Bank of Canada Governor Tiff Macklem told a crowd in Halifax on Monday that U.S. tariffs could cut Canadian economic growth in half in the fourth quarter if they remain in place. Macklem said businesses may delay investment and hiring decisions because of the uncertain business climate the tariffs create. (Sept. 21, 2026)

A delayed response could mean the central bank would have to raise interest rates very quickly, Macklem later told reporters, a move that would be painful for borrowers.

“That’s very difficult for people. People can adjust, but it’s hard to adjust quickly,” he said.

“You’re probably going to end up having to raise them more than if you moved earlier because things will have gotten more out of hand,” he went on.

“The question we’re asking ourselves is, the current interest rate — does it remain the right one to get inflation back to target, or will we need to increase it?” 

The governor had already warned about higher inflation risks when policymakers decided to keep the rate unchanged earlier this month.

Since then, the bank has maintained a hawkish tone, leading analysts to rethink their predictions for future rate moves, with a potential hike happening sooner than previously expected. 

“If oil prices are north of $100 a barrel at the time of the next rate decision and the upcoming (inflation) report shows more passthrough from high energy prices, the Bank of Canada could raise rates in October,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients following Macklem’s speech on Monday. 

Desjardins’ prediction is that oil prices will come down, Mendes added. His official forecast continues to expect a rate hike only in the first quarter of 2027. 

During his speech, Macklem noted that key shipping routes in the Middle East remain disrupted and refineries have been damaged.

As a result, fuel prices have jumped more than expected — with recent gas prices being consistent with a crude oil price $40 (U.S.) higher than where it’s been. 

“It’s keeping inflation higher than we expected,” he said.

Macklem also warned about the U.S.-Canada trade war’s potential to hurt economic growth. 

“The latest escalation could once again cause businesses to delay investment and hiring decisions — pushing some businesses back to the reassessment stage,” he said. “This would set back the progress we’ve seen and restrain growth.” 

If the tariffs remain in place, the Bank of Canada expects that growth could be roughly halved in the fourth quarter. 

Macklem emphasized that the bank alone cannot offset the damage by tariffs or influence global energy prices. 

“What it can do is ensure that global developments do not jeopardize price stability in Canada,” he said. “Our beacon is our two per cent inflation target, and we are committed to keeping inflation close to target over time.” 

The Bank of Canada’s next decision and updated quarterly economic forecast are scheduled for Oct. 28.

Ana Pereira is a business reporter for the Star, based in Toronto. Reach her via email: anpereira@thestar.ca