Canada's inflation rate remained at 3% in August, matching expectations, primarily due to a slower annual increase in gasoline prices. However, rising global oil prices, which have topped $100 a barrel in September after spending the summer between $80 and $85, are fueling concerns for the Bank of Canada. Gas pump prices were up 22.8% in August compared to a year earlier, a slight moderation from the 25.7% rise in July.
Economists are divided on the implications for monetary policy. While some, like Royce Mendes of Desjardins Group, note that moderating gas prices "temporarily" contained inflation in August, they believe policymakers will have no choice but to hike rates if oil prices do not decline soon. The Bank of Canada’s preferred core inflation measures (CPI trim and median) averaged 1.95% year over year in August, the same as July, which some economists, including Ruchir Sharma of Nomura Securities International, see as indicating contained underlying price pressures. However, others, such as Bradley Saunders of Capital Economics Ltd., highlight a second consecutive monthly increase in core inflation (with CPI trim and median rising to 2.7% annualized over the past two months) and surging oil prices as factors making a rate hike more likely this year.
The Bank of Canada's Governing Council recently kept its policy rate unchanged at 2.25% for the seventh consecutive decision. Governor Macklem emphasized that inflationary risks have sharpened since July, with persistent high global oil prices and no end in sight for the Middle East conflict. He stated that while monetary policy cannot control energy prices, the bank's role is to ensure global developments do not jeopardize price stability in Canada. Financial markets are pricing in three quarter-point hikes by mid-2027, including one before the end of 2026, with odds of a hold in October at over 92%.
Various economists have differing predictions for the Bank of Canada's next steps. Tu Nguyen of RSM Canada LLP suggests the odds of a December hike have risen and expects annual inflation to accelerate past 3% in September, though core measures might be contained by tamer home prices and food. RSM predicts the Bank of Canada will hold rates at 2.25% through 2026 before hiking in Q1 2027. Conversely, Derek Holt of Bank of Nova Scotia argues that several core inflation measures are already well above the 2% target (e.g., trimmed mean CPI at 3.9% month-over-month seasonally adjusted annual rate), making a case for an interest rate increase at the October 28 meeting. The Bank of Canada’s neutral range is between 2.25% and 3.25%.
