Canada's annual inflation rate held steady at 3% in August, matching expectations, as a slower annual increase in gasoline prices provided some temporary containment. Despite this, gas prices were still 22.8% higher in August compared to a year earlier, following a 25.7% increase in July. This sustained inflation, particularly driven by energy costs due to the ongoing Middle East conflict, keeps the rate at the upper end of the Bank of Canada's 1% to 3% target zone. The central bank has maintained its policy rate at 2.25% for seven consecutive decisions, but Governor Tiff Macklem has expressed concerns about inflation remaining too high.
Global oil prices have surged, with crude topping $100 a barrel in September after hovering between $80 and $85 during the summer. This rise in oil prices is seen as a significant factor that could push broader inflation higher. While core inflation measures like CPI trim and median averaged 1.95% year-over-year in August, some economists, including Royce Mendes of Desjardins Group, believe that if oil prices do not decline soon, the Bank of Canada will have no choice but to raise rates. Derek Holt from Bank of Nova Scotia also argues for an interest rate increase at the October 28 meeting, citing several core inflation measures exceeding the 2% target.
Economists are now increasingly considering the possibility of a rate hike before the end of 2026. Stephen Brown of Capital Economics suggests a December hike is on the table given persistently high global oil prices. Tu Nguyen of RSM Canada LLP also indicated that the odds of a December hike have risen, especially if the conflict in Iran continues. Financial markets are pricing in at least one quarter-point hike by the end of 2026, with three quarter-point hikes factored in by mid-2027. However, RSM Canada still anticipates the Bank of Canada to hold rates at 2.25% for the rest of 2026, with a hike in the first quarter of 2027.
