Bank of Canada Gov. Macklem Pledges to Proceed Carefully on Further Rate Increases — Update

By Paul Vieira

OTTAWA--Bank of Canada Gov. Tiff Macklem told the country's lawmakers that policymakers would proceed cautiously on delivering more rate increases due to elevated trade and geopolitical uncertainty.

During two hours before the federal legislature's finance committee, Macklem defended the decision to raise interest rates last week, saying officials needed to address a buildup of cost pressures and expectations that a larger share of firms would raise their prices over the next 12 months. Even with last week's quarter-point hike, the governor said rate policy would still provide support for an economy that's improving but not necessarily strong.

Macklem mostly reiterated the reasons behind last week's decision to raise interest rates: namely, a much higher inflation outlook driven by elevated energy prices and a modest improvement in growth.

The Bank of Canada increased its policy rate to 2.5% last week, marking the first boost in over three years. Macklem said there "could be a need to raise" rates further, while acknowledging that heightened levels of uncertainty continue to hover over the Canadian economy.

"Developments in the Middle East and Canada-U.S. trade relations both remain fluid," Macklem said.

"There is also uncertainty about the impact of new U.S. tariffs and how much energy costs will seep into consumer prices more broadly," he said.

However, he added, "we don't want to see higher inflation persisting."

Some economists, however, say they may revisit their outlook for rates following some weaker-than-expected indicators, most notably data measuring grossdomestic product. Employment data for October is out Friday, and a third-straight weak report could dial back market expectations for rate hikes, analysts say.

The Bank of Canada modestly upgraded its growth outlook for the economy, and in testimony Macklem cited an increase in exports, improvements in business investment, and evidence that firms are adapting to changes in the trade environment.

The economy, Macklem said, "is actually showing impressive resilience," and thereby no longer needs rate policy to be as accommodative. At 2.5%, the central bank's policy rate remains below the midpoint for neutral--the level at which interest rates neither contract nor stimulate economic activity. The Bank of Canada estimates the neutral rate in Canada is between 2.25% and 3.25%.

"What I would stress here is that at 2.5%, our policy rate is still not restraining growth. We've actually been supporting growth, but the economy doesn't need quite as much support," he said.

Some lawmakers questioned the need for a rate hike, with a member from the governing Liberals arguing this could dampen efforts by Prime Minister Mark Carney to increase business investment.

Macklem said there is ample evidence that a sizable share of firms intend to pass along their increased input costs to customers over the next 12 months. The central bank's official forecast has inflation over 3% for most of 2027, and returning gradually to its 2% target by mid-2028.

"We've got to do our best to look forward, to anticipate where the economy is going, and to use our interest rate to nudge inflation back to target," the governor said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

November 03, 2026 13:43 ET (18:43 GMT)