Bank of Canada Governor Warns of Worsening Inflation Outlook and Signals Possible Further Rate Hikes

Bank of Canada Governor Tiff Macklem told MPs on November 3 that Canada's inflation outlook has deteriorated, driven primarily by persistent conflict in the Middle East pushing global oil prices higher and increasing costs for consumers and businesses. He said CPI inflation is now expected to rise to 3.5% by year-end, remain at or above 3% through much of 2027, and only return near 2% by mid-2028, a timeline that pushes the inflation target well into the future.

Macklem noted that the Canadian economy has shown resilience despite US trade actions, with GDP growth reaching 3.3% in Q2 and Q3 growth estimated around 2%. However, growth is expected to slow in Q4 as new US tariffs weigh on activity, before recovering in 2027. The Bank projects GDP growth of 1% in 2026, rising to approximately 2% in both 2027 and 2028.

On monetary policy, Macklem said further rate hikes may be needed but that future decisions will be taken meeting by meeting given elevated uncertainty. He also pushed back on the idea that fiscal and monetary policy are working at cross-purposes, stating that in current circumstances he does not think fiscal policy is making it harder to bring inflation down.

Elsewhere in macro markets, Natixis closed its long position in 2-year US notes, citing profit-taking and a reduction in expectations for Federal Reserve rate hikes, while also flagging a market split on how to position for a potential Democratic sweep in the US midterm elections. Looking ahead, markets are watching for euro-area inflation data expected to rise to 4.0%, a possible Riksbank rate hike to 2.00%, and US ADP payrolls and ISM services figures that will test the roughly 77% probability markets are assigning to a Fed hike in December.