With Oil fuelling inflation risks, BoC’s Macklem points to further rate hikes

Further monetary tightening remains a possibility, with Bank of Canada (BoC) Governor Tiff Macklem saying that “further rate hikes may be needed” as the Middle East war keeps energy prices “higher for longer.” He made the remarks on Tuesday while appearing before the House of Commons Standing Committee on Finance.

His prepared remarks put CPI at 3.5% by year-end, above the 3% threshold through 2027 and back near 2% by mid-2028. On the growth front, he expects GDP to expand by 1% in 2026 and 2% in 2027 and 2028.

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What are the key takeaways?

Inflation prospects have worsened as the continuing Middle East war has pushed up global oil prices, which are expected to stay elevated for longer. Canadians are facing higher fuel bills, while many businesses are seeing costs rise

With uncertainty elevated, decisions will be made at each meeting, although additional rate increases may be required

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

Following GDP growth of 3.3% in Q2, the Q3 expansion is estimated at around 2%

Despite US trade measures, Canada's economy remains resilient and its growth outlook has improved modestly

The GDP growth forecast stands at 1% for 2026 and approximately 2% for each of 2027 and 2028

New US tariffs are expected to weigh on growth in Q4, with a recovery anticipated in 2027

Consumer and business costs are rising because of higher oil prices and refinery margins; a larger pass-through to inflation is expected over the coming year

Under current conditions, he does not believe fiscal policy is making inflation harder to bring down

How Is the Canadian Dollar Performing Today?

Against the major currencies listed below, the Canadian Dollar (CAD) performed best against the Japanese Yen today. The table sets out its percentage movements against these currencies for the day.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.00%	-0.04%	0.35%	0.02%	0.33%	0.04%	0.32%
EUR	-0.00%		-0.03%	0.34%	0.01%	0.33%	0.03%	0.32%
GBP	0.04%	0.03%		0.36%	0.05%	0.36%	0.07%	0.36%
JPY	-0.35%	-0.34%	-0.36%		-0.32%	-0.02%	-0.30%	-0.01%
CAD	-0.02%	-0.01%	-0.05%	0.32%		0.32%	0.03%	0.31%
AUD	-0.33%	-0.33%	-0.36%	0.02%	-0.32%		-0.28%	0.00%
NZD	-0.04%	-0.03%	-0.07%	0.30%	-0.03%	0.28%		0.29%
CHF	-0.32%	-0.32%	-0.36%	0.01%	-0.31%	0.00%	-0.29%

Percentage movements between the major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. To read CAD (base)/USD (quote), for instance, choose the Canadian Dollar on the left and follow that row across to the US Dollar; the intersecting cell gives the percentage change for that pair.

Bank of Canada: Key Questions Answered

How does the Bank of Canada's role shape the Canadian Dollar?

Based in Ottawa, the Bank of Canada (BoC) determines Canada's interest rates and conducts its monetary policy through eight scheduled meetings each year, alongside emergency meetings convened when necessary. Maintaining price stability is its primary mandate, meaning inflation should remain within 1-3%. Interest rate increases and reductions are its principal means of meeting that goal. When rates are relatively high, the Canadian Dollar (CAD) generally strengthens; relatively low rates tend to have the opposite effect. The central bank also uses quantitative easing and quantitative tightening.

How does Quantitative Easing (QE) work, and what does it mean for the Canadian Dollar?

When conditions become extreme, the Bank of Canada may turn to Quantitative Easing as a policy measure. Under QE, it prints Canadian Dollars to purchase assets, typically government or corporate bonds, from financial institutions. The CAD usually weakens as a result. This is a last-resort measure used when interest rate cuts alone are unlikely to secure price stability. During the Great Financial Crisis of 2009-11, the Bank of Canada deployed QE after banks lost confidence in one another's ability to repay debts and credit markets froze.

How does Quantitative tightening (QT) work, and why does it affect the Canadian Dollar?

Once an economic recovery is underway and inflation begins to increase, quantitative tightening (QT) reverses the earlier QE process. Under QE, the Bank of Canada supplies financial institutions with liquidity by purchasing government and corporate bonds. Under QT, however, the BoC halts further asset purchases and no longer reinvests principal repayments from maturing bonds in its existing holdings. This generally supports the Canadian Dollar and is considered bullish for the currency.