Macklem says Bank of Canada could raise or cut rates if U.S. trade curbs or oil-driven inflation shift outlook

OTTAWA — Bank of Canada Gov. Tiff Macklem said Wednesday the central bank could move interest rates in either direction from here, cutting them if new U.S. trade restrictions significantly damage growth or raising them, potentially in back-to-back moves, if higher oil prices spread into broader inflation.

Macklem delivered the message in an opening statement to the Senate Standing Committee on Banking, Commerce and the Economy, alongside Senior Deputy Governor Carolyn Rogers, as he summarized the bank’s quarterly Monetary Policy Report and last week’s rate decision. “Last Wednesday, Governing Council maintained the policy interest rate at 2.25%,” Macklem said, referring to the Bank of Canada’s April 29 decision to leave its benchmark rate unchanged.

His remarks laid out a clear decision tree for what could prompt the next move.

“If the United States imposes significant new trade restrictions on Canada, we may need to cut the policy rate further to support economic growth,” Macklem said. “Alternatively, if oil prices continue to increase, and particularly if they remain elevated, the risk that higher energy prices become ongoing generalized inflation increases. If this starts to happen, there may be a need for consecutive increases in the policy rate.”

The Bank of Canada said it is navigating unusually high global and geopolitical uncertainty, but still expects the Canadian economy to keep expanding. In the outlook referenced by Macklem, the bank forecast real gross domestic product growth of 1.2% in 2026, 1.6% in 2027 and 1.7% in 2028.

At the same time, Macklem said the labor market remains soft. The unemployment rate has stayed in the 6.5% to 7% range, he said, reflecting weak hiring and fewer job seekers.

Inflation has also picked up. Macklem said consumer price inflation rose to 2.4% in March from 1.8% in February, mainly because of sharply higher gasoline prices. Based on recent market expectations for oil prices, the bank expects inflation to peak at around 3% in April before easing back to target early next year.

Much of that pressure is tied to the war in the Middle East, which Macklem said has pushed up global energy prices, increased financial market volatility and disrupted shipments of fertilizer and other commodities. Those effects are weighing on growth while also adding to inflation pressures.

“Governing Council agreed to look through the war’s immediate impact on inflation but if energy prices stay high, we will not let their effects become persistent inflation,” Macklem said.

That focus reflects the Bank of Canada’s core mandate: keeping inflation at the 2% midpoint of a 1% to 3% control range. A temporary spike in gasoline prices would not necessarily force a policy response, but broader and lasting price increases would.

Macklem said that is why policymakers are emphasizing flexibility. With uncertainty elevated and the risks pulling in opposite directions, he said monetary policy may need to be nimble.

The appearance did not produce a new rate decision. Instead, it offered the bank’s most explicit public description yet of the conditions that could lead it to ease again or tighten further after holding its policy rate at 2.25% last week.