Bank of Canada flags higher inflation outlook as oil prices surge

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Bank of Canada inflation outlook

Highlights

Bank of Canada will significantly raise its quarterly inflation forecast this month due to surging crude oil and petroleum product prices.
The central bank's updated inflation and growth projections will guide the Oct. 28 interest rate decision amid persistent inflation risks from supply disruptions.
Money markets expect no rate hike in 2023 but are pricing in 100 basis points of increases in 2024, reflecting concerns that inflation pressures may persist.

Revised forecasts ahead of rate decision

As reported by Reuters, the Bank of Canada expects to lift its quarterly inflation forecast significantly this month as elevated crude oil and petroleum product prices continue to add pressure to the outlook.

The new inflation and growth projections are set to inform the central bank's interest rate decision on Oct. 28. Speaking to journalists on a conference call from Bangkok, Governor Tiff Macklem says the ongoing Middle East conflict, curtailed shipments and damage to refining capacity have increased the risk that inflation spreads more broadly and becomes more persistent.

Macklem says the central bank remains focused on its 2% inflation target and is prepared to adjust monetary policy as needed. He says policymakers are weighing whether inflation is likely to move back toward target on its own or whether higher interest rates will be needed to influence that path.

Market expectations and broader economic risks

Money markets have been increasing expectations for rate rises in recent months, but as of Saturday they are not pricing in a move at the Oct. 28 meeting or at the bank's final monetary policy decision in December.

Even so, markets are pricing in 100 basis points of increases over the course of next year, reflecting expectations that inflation risks may remain stubborn. For central bankers, a key question is whether higher oil and fuel product prices spill over into the wider economy rather than remaining confined to the energy sector.

Macklem says the global economy has shown resilience despite the Middle East conflict and the Russia-Ukraine war, but that resilience is being tested by higher costs and tighter financial conditions. He also says governments have less fiscal room to maneuver and need to adjust policy to rebuild that capacity.

In our earlier article on the market fallout from surging oil prices and inflation fears, we described how crude climbing toward $110 a barrel added to concerns about sticky inflation and the path of U.S. interest rates. We also noted that the same inflation backdrop coincided with a sharp sell-off in AI-related technology stocks, as investors reassessed valuations and braced for tighter financial conditions.

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