Bank of Canada head Macklem warns consecutive rate hikes possible if oil prices stay high

What the desk is arguing

The desk frames this as a pivotal moment for the Bank of Canada, as Governor Macklem's warning about potential consecutive rate hikes underscores a shift in the central bank's approach to inflation management. The backdrop of rising oil prices, which have been exacerbated by geopolitical tensions, poses a risk of broader inflationary pressures that the Bank may need to combat with more aggressive monetary policy.

Supporting this view, Macklem noted that CPI inflation has increased from 1.8% in February to 2.4% in March, driven largely by surging gasoline prices. The Bank's projections suggest inflation could peak at around 3% in April before retreating towards the 2% target, contingent on oil prices stabilizing. This scenario indicates a delicate balancing act for the central bank as it navigates between supporting economic growth and controlling inflation.

Where it sits in our coverage

Our consensus target for CAD/USD is 1.075, with a range from 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

This view aligns with jpmorgan, which anticipates a more hawkish stance from the BoC, while bofa remains cautious, suggesting a lower target. The desk's outlook is positioned at the upper end of the consensus range, reflecting a belief in potential tightening ahead.

How other firms see it

Firms like jpmorgan and citi are aligned with the desk's perspective, anticipating that the BoC may need to act more decisively if inflationary pressures persist. Conversely, bofa and hsbc express skepticism about the need for aggressive rate hikes, citing concerns over economic growth and trade uncertainties.

Key currency pairs to watch include CAD/USD and CAD/JPY, as movements in these pairs will likely reflect the evolving narrative around Canadian monetary policy and global oil prices.