Tiff Macklem says the Bank of Canada won't be 'too slow' to hike rates — what Canadians with mortgages should do before Oct. 28

Now the assumption of low-rates to cool ongoing inflationary pressures isn’t starting to be questioned.

According to the BoC’s summary of Governing Council deliberations, members agreed that if high energy prices spill over into other goods and services: a “monetary response to prevent broad-based inflation” may be required before the year is done.

That doesn’t mean a rate hike is coming at the BoC’s next announcement on Oct. 28. In fact, TD Economics still expects the Bank to remain on hold for the rest of 2026.

But in a Sept. 21 speech, Governor Tiff Macklem made it clear that another hike is possible if today’s inflation problem proves persistent.

“We don’t want to raise our policy rate and restrain growth if inflationary pressures are contained,” Macklem said. “But nor do we want to be too slow to respond if inflationary pressures are becoming more persistent.”

Financial markets aren’t as confident — even TD analysts are pricing in at least one rate hike before year-end.

What’s really pushing inflation risk higher?

Despite the tariff headlines, the BoC’s biggest worry is energy.

To illustrate the bank’s concern, consider the consumer price index (CPI), a main economic indicator that measures the average change over time in the prices paid by urban consumers for a representative market basket of consumer goods and services. In August Canada’s CPI rose 3.0% year-over-year, matching July’s CPI, according to Statistics Canada, the federal statistics agency; in the same time frame gasoline prices rose 22.8%.

While trade tariffs certainly impact consumer spending, the biggest economic factor, according to the BoC member council, is America’s war on the Middle East.

In his speech to business leaders in Halifax, Nova Scotia, Macklem confirmed that the BoC can “look through” a temporary jump in gasoline prices, but can’t ignore persistent higher energy costs. As he explained: under regular circumstances, every 10% increase in the cost of oil adds about 0.2% to CPI, but with damaged refining capacity and global supply restrictions, Canadians and the rest of the world are getting an unusually large gasoline-price shock relative to the underlying oil price. Based on BoC calculations, oil is approximately US$40 higher than where it should be — meaning that a Canadian should be spending $100 on gas, but due to the Middle East conflict, they are spending $140 on gas.

What’s more troubling, says Macklem, is if oil stays near US$100 per barrel, as this would push inflation up in the coming months — and this may require a BoC adjustment in monetary policy.

How higher oil prices leads to rising interest rates

The BoC’s calculations are predicated on higher energy costs spreading through the economy. This is because fuel is an input cost for an enormous range of businesses. For example, manufacturers ship materials, farmers run machinery, retailers transport merchandise and airlines buy jet fuel. If fuel prices stay elevated, businesses will eventually try to recover those higher costs by raising prices. This leads to inflation and, to curb this, the BoC raises the overnight target rate.

In this scenario, Canada’s central bank ends up raising rates even while economic growth remains relatively weak.

Tariffs play a supporting role

The focus on energy costs doesn’t mean tariffs don’t play a part.

The BoC expects Canada’s counter-tariffs — which mainly target non-consumer goods with Canadian substitutes — to have a modest impact on inflation. But even with substitutions and the push to diversify trading partners, trade actions on both sides of the border will add to business costs — costs that could be passed on to consumers over time.

The bigger threat is how tariffs impact economic growth. While new U.S. tariffs only impact about 5% of Canadian goods exported to the U.S., Macklem warns that if they remain in place, growth could be sliced in half in the final months of 2026 — to below 1% growth in GDP.

Why do some economists think a hike is premature?

Markets are leaning toward tighter policy, with pricing that suggests four BoC hikes by mid-2027, according to TD Economics, the economic research arm of TD Bank Group. But despite these predictions, Director and Senior Economist at TD Economics, Andrew Hencic, believes the hikes would be “premature.”