By Paul Vieira
OTTAWA--Bank of Canada Gov. Tiff Macklem said officials would act quickly should evidence emerge that the impact from higher energy prices begins to spread beyond gas stations to other goods and services.
Still, Macklem told lawmakers the central bank believes inflation would peak in April at around 3%, and gradually ease toward its 2% target by early 2027. This is based on an assumption that crude-oil prices decline to $75 a barrel by mid-2027.
Senior officials have agreed to avoid overreacting to the war in Iran's immediate effects on inflation, "but if energy prices stay high, we will not let their effects become persistent inflation," Macklem said in testimony to lawmakers on Monday.
His remarks, and subsequent testimony, to members on the Canadian legislature's finance committee largely reiterated the main themes from the Bank of Canada's decision last week to keep its main interest rate unchanged at 2.25%. They also demonstrated the tough spot Macklem finds himself in, trying to navigate forces that could push borrowing costs higher or lower.
As he did last week, Macklem warned a prolonged period of higher energy prices could spill over and prompt consecutive rate increases to tamp down inflation. Conversely, he told lawmakers a new round of trade threats from President Trump, with talks set to intensify this summer, may damage business and household confidence and require rate cuts to soften the blow.
"The Bank of Canada faces a delicate balancing act," Andrew Hencic, an economist at TD Bank, said in commentary late last week. "Wait and see is the mantra--for now--but the clock is ticking."
Fighting in the Iran war flared for the first time in weeks on Monday, as strikes on a crucial United Arab Emirates oil port and several ships tested a shaky cease-fire. Futures for Brent crude, the international benchmark, rose 6%, to about $114.50 a barrel. U.S. oil futures are up 4%, to $106.
In last week's rate-policy decision, officials said they expected little change in the level of rates so long as the economy unfolded as the central bank expected. Fixed-income traders, however, jumped on Macklem's remarks at a press conference about the possible need for consecutive rate hikes should energy prices remain elevated for a longer-than-anticipated period. Traders, as a result, have priced in the likelihood of two rate increases before the end of 2026, although some economists argue this represents an overreaction given underlying economic softness and trade-policy risks.
Liberal lawmaker Kent MacDonald said he worried that interest-rate increases could weigh negatively on households managing mortgages and everyday expenses.
Higher rates would hurt households and small firms, Macklem said, "but the alternative is to let inflation get out of control. That hurts everybody even more." He said an increase in core inflation, which strips out volatile items like food and energy, would mark a warning sign that higher-energy prices are starting to spread. "It's going to depend a lot on what actually happens with global oil prices. It's going to depend on companies, whether they absorb those prices or they pass them through," he said.
Macklem also addressed the risk of a weaker economy stemming from U.S.-Canada trade tensions. A U.S.-led review of the existing U.S.-Mexico-Canada trade treaty, or USMCA, is set for this summer. Talks between Ottawa and Washington have stalled, and Trump administration officials have described discussions with Canada as challenging.
The U.S. may "come out with new threats, and they may make a lot of noise, so we'll see what they will throw at us," Macklem said.
Macklem is scheduled to testify before Canada's Senate on Wednesday.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
05-04-26 1752ET
