By Paul Vieira
OTTAWA--Bank of Canada Gov. Tiff Macklem said Friday he expects inflation accelerated in March, although likely below 3%, and that officials will pay close attention to medium- and longer-term inflation expectations when deciding whether rate hikes are necessary.
The central bank does not "want to jump too early and raise interest rates and lower growth, particularly when growth is already weak. On the other hand, you don't want to be late and let inflation get a hold and become entrenched," Macklem told reporters from Washington, where he attended the spring meetings of the International Monetary Fund and World Bank.
Statistics Canada is scheduled to release inflation data for March on Monday. Hours later, the Bank of Canada will issue its quarterly survey gauging sentiment among businesses and households, which will provide the first clue about inflation expectations.
Businesses are influenced by their expectations for inflation when it comes to wage negotiations, price setting and financial contracting for investment. For households, expectations on prices will influence spending and savings. Well-anchored inflation expectations help central banks attain their inflation targets, which is 2% for the Bank of Canada.
Macklem said he is not too worried about higher near-term inflation expectations, which will be sensitive to the sharp jump in energy prices stemming from the conflict in Iran. If businesses and households aren't confident that inflation will come back to 2% in the medium term, "then that's the sort of thing that would really worry us."
Energy prices fell by as much as 10% Friday, after Iran said the Strait of Hormuz would be open to all commercial vessels. However, President Trump said the U.S. naval blockade on Iranian ports would remain in force.
Traders had dialed back their bets for a Bank of Canada rate increase in 2026 amid Iran's decision, said Avery Shenfeld, chief economist at CIBC Capital Markets. On Thursday, traders in the overnight-index swap market had priced in a quarter-point rate increase in October. Now, traders view an October rate hike as a 60% probability. "We would expect to see that melt away if there's more progress towards a deal with Iran," Shenfeld said.
The Bank of Canada issues its next interest-rate decision on April 29.
Macklem said Bank of Canada officials do not expect higher energy prices to rapidly pass through and lift prices for other goods and services. Unlike earlier this decade, when inflation after the Covid-19 pandemic reached a four-decade high, Macklem said headline inflation was below 2% prior to the war in Iran. Furthermore, core prices have decelerated and the economy is operating with spare capacity, which should put a limit on price increases.
Still, there have been warning signs this week on inflation. Small Canadian firms reported price increases of over 3% in April, according to a survey from the Canadian Federation of Independent Business. And a consumer-confidence gauge, from the not-for-profit research group Signal49, suggested that 50% of Canadians believe inflation will be above 3% over the next three years.
Central bank officials will be monitoring the frequency and size of price increases passed on by firms, Macklem said.
He said higher energy prices are "squeezing consumers and businesses, and investment is being held back as firms wait for clarity on energy, trade and geopolitical relations." Macklem added that recent steps to de-escalate tensions in the Middle East are welcome, but risks remain elevated. "There is considerable uncertainty about the extent and persistence of the conflict, the ongoing consequences for shipping through the Strait of Hormuz and the extent of infrastructure damage" in the Gulf states, he said.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
04-17-26 1501ET
