Macklem warns oil price shock and Middle East conflict demand a policy response
The Bank of Canada raised its policy interest rate by 25 basis points to 2.5% on October 28, its first increase since July 2023, as Governor Tiff Macklem declared the central bank's commitment to price stability in "this period of global upheaval," anchoring the decision in a Middle East oil shock and unsettled Canada-US trade relations.
Speaking alongside Senior Deputy Governor Carolyn Rogers in Ottawa, Macklem identified two developments that had shifted the Bank's calculus since July 2026: a deteriorating inflation outlook, with oil prices expected to "remain higher for longer" as the Middle East conflict persisted, and a stronger domestic recovery despite US tariff pressure.
"We are mindful that uncertainty is still elevated," he said.
"Developments in the Middle East and Canada-US trade relations both remain fluid."
Consumer Price Index (CPI) inflation has held near 3% since April and is projected to reach roughly 3.5% by year-end, with the 2% target not expected until mid-2028.
CPI excluding gasoline remains at 2.2% and core inflation sits near 2%.
"The longer energy prices remain high, the more likely it is these costs will spill over to consumer prices more broadly," Macklem said.
Oil, trade tensions, and the inflation risk that tipped the Bank's hand
Governing Council weighed that risk against solid economic data. Gross domestic product (GDP) grew 3.3% in the second quarter, with preliminary indicators pointing to about 2% growth in the third quarter, per the Bank of Canada's October 2026 Monetary Policy Report.
The unemployment rate has held near 6.5%, and full-year 2026 GDP growth is forecast at just 1% as US tariffs weigh on activity.
Not all forecasters agreed the moment called for action.Stéfane Marion, chief economist at National Bank of Canada (NBC) in Montréal, told the Mortgage Professionals Canada (MPC) conference in Calgary last week that core data argued for patience.
"Core inflation is still at 2%," he said.
"I don't think that the Bank of Canada should be hiking [on October 28] and if they do hike, they can't be too aggressive."
What the hike means for mortgage brokers
For Canadian mortgage brokers, the decision reshapes client conversations immediately.
Variable-rate mortgage holders will see payments rise as lenders' prime rates move from 4.45% to 4.70%, a shift that renewal discussions and rate-path strategy had been building toward all year, and Wednesday's announcement intensifies the pressure.
Leah Zlatkin, a Toronto-based licensed mortgage broker and expert commentator with LowestRates.ca, said one move is unlikely to be the last.
"If there is a hike, I do think it's going to be a cycle," Zlatkin said.
TD Bank economist Marc Ercolao, speaking from Toronto, said Macklem had telegraphed the outcome weeks earlier.
"It was Bank of Canada Governor Macklem's remarks a couple of weeks ago that likely tipped the scales towards today's decision to hike," Ercolao said.
"The Bank of Canada said it does not see a clear offramp to the conflict in the Middle East and is increasingly worried about the risks to inflation."
Governing Council signalled caution on what comes next, stopping short of any firm commitment to further action.
"Looking ahead, Governing Council agreed we would take future decisions one meeting at a time," Macklem said.
"There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully."
The Bank's next rate decision is set on December 9.
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