Bank of Canada Forecasts Higher Inflation on Persistent Energy Costs
The Bank of Canada expects to raise its quarterly inflation forecast significantly this month due to persistently high crude oil and petroleum product prices, Governor Tiff Macklem announced on Saturday. Speaking to journalists on a conference call from Bangkok during the International Monetary Fund meetings, Macklem stated that ongoing Middle East conflicts, curtailed shipments, and damaged refinery capacity have increased the risk that inflation will broaden and become more persistent, according to Reuters.
While the central bank has held its benchmark interest rate steady at 2.25 percent for the past seven rate decisions, financial markets are increasingly weighing potential shifts. Bloomberg data cited by The Globe and Mail indicates that markets priced in a roughly 35 percent chance of a quarter-point rate hike for the October 28 announcement, rising to 95 percent for the following rate decision on December 9. Conversely, Investing.com noted that core inflation measures remain closer to 2 percent, supporting arguments from economists like Avery Shenfeld that temporary energy spikes might not force an immediate rate increase.
Brent Crude Surpasses July Projections as Global Supply Tightens
Global energy markets have diverged sharply from the Bank of Canada’s summer expectations. When the bank published its quarterly forecast in July, it anticipated Brent crude to average roughly US$75 per barrel in the third quarter. Instead, Brent has traded at around US$110 per barrel, with West Texas Intermediate at US$101, The Globe and Mail reported.
Bank of Canada’s Tiff Macklem sees energy price challenges for interest rate outlookhttps://t.co/zTJnepwH30
Macklem cautioned that international reliance on strategic petroleum reserves has limits. Countries like China have already reduced their global demand and drawn down large reserves, and at some point, major consumers must return to the open market. TD Securities economist Robert Both projected that Canadian headline Consumer Price Index inflation would rise to 3.2 percent year-on-year in September, driven primarily by gasoline and energy costs, FXStreet reported. Meanwhile, core metrics such as CPI-trim and median are projected to edge down to 1.9 percent, illustrating a split between volatile energy segments and subdued broader price pressures.
Trade Pressures and Currency Depreciation Compound Economic Risks
Beyond energy markets, domestic economic stability faces headwinds from a softening currency and escalating trade tensions. The Canadian dollar has lost about 5 percent of its value against the central bank’s trade-weighted currency basket since early summer 2025, according to Investing.com. Historical modeling suggests this depreciation could add around 0.3 percentage points to inflation at its peak impact by making imports more expensive.
Analysts noted that the third-quarter Business Outlook Survey, released alongside fresh consumer price data, would reveal whether energy costs are permeating broader corporate supply chains. Businesses previously reported weaker sentiment due to fuel expenses and trade uncertainty, risks that escalated following new U.S. Section 338 measures on August 22. Furthermore, a threatened 50 percent U.S. tariff on Canadian autos and parts from January 1 threatens to constrain growth.
Frequently Asked Questions About the October Rate Decision
What specific data will the Bank of Canada review before October 28?
The central bank will evaluate the newly updated quarterly inflation and growth forecasts, September Consumer Price Index figures, and the third-quarter Business Outlook Survey results, as reported by Reuters and The Globe and Mail.
How much has the Canadian dollar dropped against its trade-weighted basket?
The Canadian dollar has declined by about 5 percent since early summer 2025, adding upward pressure to import prices, according to data cited by Investing.com.
What are economists forecasting for September headline inflation?
TD Securities and CIBC project that Canada’s annual headline inflation rate will rise to 3.2 percent in September from 3.0 percent in August, largely due to higher gasoline and energy prices, according to FXStreet and Investing.com.
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