Bank of Canada head Macklem warns consecutive rate hikes possible if oil prices stay high
The desk interprets Governor Tiff Macklem's recent comments as a significant shift towards a more hawkish stance for the Bank of Canada, particularly in light of rising oil prices potentially driving broader inflation. Per the full note source, Macklem indicated that sustained high oil prices could necessitate consecutive interest rate hikes, a marked change from the previous easing bias. Current CPI inflation has risen to 2.4%, with projections suggesting a peak of around 3% in April, reinforcing the urgency of the central bank's monitoring of inflationary pressures. This shift aligns with our consensus target of 1.075 for CAD/USD, reflecting a cautious yet vigilant approach to monetary policy amidst global uncertainties.
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.
Key takeaways
- 01Governor Macklem signals potential for consecutive rate hikes if oil prices remain high.
- 02CPI inflation has risen to 2.4%, with projections indicating a peak around 3% in April.
- 03The Bank of Canada is navigating a delicate balance between supporting growth and controlling inflation.
- 04The desk's outlook is at the upper end of the consensus range, reflecting a hawkish shift.
Market implications
Traders should monitor CAD/USD closely, particularly for movement above 1.075, as this could signal a shift in market expectations regarding rate hikes. Additionally, any significant changes in oil prices could impact positioning ahead of the next BoC meeting.
Bank of Canada Governor Tiff Macklem warned that if high oil prices begin feeding into broader inflation, the central bank may need to deliver consecutive increases to its policy rate. Summary: The Bank of Canada held its policy interest rate at 2.25% at last week's meeting, with Governor Tiff Macklem telling the Senate Standing Committee on Banking, Commerce and the Economy that changes in the rate can be expected to be small if the economy evolves in line with the baseline forecast, per his opening statement Macklem warned that if oil prices continue to rise and remain elevated, the risk of higher energy costs becoming generalised persistent inflation increases, and that scenario could require consecutive increases to the policy rate, according to the statement CPI inflation rose from 1.8% in February to 2.4% in March, driven by higher gasoline prices, with the Bank projecting inflation will peak around 3% in April before easing back to target by early next year, per Macklem's remarks The Bank projects GDP growth of 1.2% in 2026, 1.6% in 2027, and 1.7% in 2028, with the labour market described as soft and the unemployment rate sitting in the 6.5% to 7% range, according to the opening statement Macklem said the Middle East conflict has pushed global energy prices sharply higher, increased financial market volatility, and disrupted shipping for fertiliser and other commodities, weighing on the global growth outlook, per his remarks to the committee On the other side of the risk spectrum, Macklem said significant new U.S. trade restrictions on Canada could require a further rate cut to support growth, per the same statement Bank of Canada Governor Tiff Macklem raised the prospect of consecutive interest rate increases on Tuesday, warning that a sustained rise in oil prices could force the central bank into a tightening cycle if elevated energy costs begin spreading into broader inflation across the economy. Appearing before the Senate Standing Committee on Banking, Commerce and the Economy alongside Senior Deputy Governor Carolyn Rogers, Macklem's opening statement (full text here) outlined the Governing Council's decision last week to hold the policy rate at 2.25%.
While the central bank's baseline scenario anticipates only modest rate adjustments, Macklem made clear that the balance of risks had shifted materially since the January forecast, with the Middle East conflict emerging as a significant inflationary force. The war has sent global energy prices sharply higher, amplified financial market volatility, and disrupted the shipping of fertiliser and other commodities. Those effects have simultaneously dragged on the global growth outlook while adding upward pressure to prices.
In Canada, Macklem said, the impact has been most visible at the pump, where surging gasoline costs are compounding still-elevated food price inflation and squeezing household budgets. CPI inflation climbed from 1.8% in February to 2.4% in March. The Bank's current projections have inflation peaking at around 3% in April before gradually retreating toward the 2% target by early next year, assuming oil prices ease from current levels and U.S. tariffs remain at their existing level.
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