The Bank of Canada sends a hawkish signal: it does not want to act too slowly on the interest rate hike issue, and oil prices are a key risk

The Zhitong Finance App learned that Bank of Canada Governor MacLum said that if inflationary pressure shows signs of more lasting, policymakers don't want to act too slowly on the interest rate hike issue. As the Middle East conflict pushes up energy prices, the risk of Canada's inflation remaining high is rising, and monetary policy may need to respond to this.

According to McClam's speech delivered on Monday in Halifax, Nova Scotia, Canada, he said that the Bank of Canada neither wants to raise borrowing costs or curb economic growth while inflationary pressure is under control, nor does it want to respond too slowly when inflationary pressure becomes more protracted.

This statement continues the hawkish policy tone since the Bank of Canada's interest rate meeting this month. The Bank of Canada kept the policy interest rate unchanged at 2.25% on September 2, but emphasized that energy prices continued to be high due to the Middle East conflict, increasing the upward risk faced by the inflation outlook.

McClum pointed out that the year-on-year increase in the Canadian Consumer Price Index (CPI) has remained around 3% recently, largely driven by rising gasoline prices. If oil prices continue to stay around $100 per barrel, the Bank of Canada expects the overall inflation rate to rise slightly in the next few months.

At present, there are still limited signs that high energy prices will spread to the prices of other goods and services. According to data previously released by the Bank of Canada, after excluding gasoline, Canada's inflation rate in July was 2.2%, and the core inflation index remained around 2%. However, as the conflict in the Middle East continues and energy prices remain high, the Bank of Canada is increasingly concerned that energy costs will eventually be transmitted to a wider range of consumer prices.

The Bank of Canada made it clear at the September policy meeting that the longer oil prices and refining profit margins remain high, the greater the risk that the rise in energy prices will evolve into more durable and widespread inflation. Should this transmission eventually occur, monetary policy may require a response. This means that although the Canadian economy still has some idle production capacity, energy prices have become an important variable affecting the Bank of Canada's interest rate path in the next phase.

Compared to being wary about the risk of inflation, McClam is relatively less pessimistic about the overall economic impact caused by the latest round of US tariffs on Canadian goods. He acknowledged that the new tariffs will have a clear impact on directly affected industries, and trade policy uncertainty may also cause companies to further delay investment and recruitment plans. However, judging from Canada's overall economy, the Bank of Canada does not expect the new round of tariffs to have a huge direct impact.

According to data from the Bank of Canada, the products affected by the new US tariffs this time account for about 5% of Canada's commodity exports to the US. At the same time, support measures introduced by the Canadian federal government are expected to mitigate some losses.

However, the indirect effects of trade frictions cannot be ignored. The Bank of Canada believes that uncertainty surrounding the Canada-US trade relationship may hurt business and consumer confidence, and further drag down corporate investment, recruitment, and household expenses.

Macram said that if these new tariffs continue to be implemented, Canada's economic growth rate in the fourth quarter may be roughly halved to less than 1%.

In the face of multiple uncertainties such as energy prices, trade frictions, and geopolitics, the Bank of Canada is also adjusting its economic forecasting tools. Macram revealed that the Bank of Canada has developed a new forecasting model called “Prima” to help policymakers better distinguish between temporary inflationary shocks and price pressures that may continue for a longer period of time.

The model will be used for the first time in the next “Monetary Policy Report” to be released in October, and will help the Bank of Canada evaluate different economic scenarios. The Bank of Canada's next interest rate decision is scheduled to be announced on October 28. At that time, the latest “Monetary Policy Report” will also be released simultaneously.