Bank of Canada Reaffirms Recent Rate Hike Ahead of Federal Budget

The Bank of Canada said it stands by last week’s decision to raise its policy interest rate by 25 basis points to 2.5%, the first increase since July 2023. Governor Tiff Mackell told the House of Commons Standing Committee on Finance that the move was needed because inflation expectations remain elevated and the economy shows resilience, reducing the risk that higher energy prices could translate into broader price pressures.

Mackell noted that ongoing conflict in the Middle East has pushed global oil prices higher, increasing costs for gasoline, diesel, heating oil and, consequently, for Canadian consumers and businesses. He warned that while many firms have absorbed higher input costs so far, surveys suggest cost pass-through could rise over the next year.

When asked about the federal government’s upcoming budget, which is expected to include tax incentives for small and medium-sized enterprises, Mackell said the rate hike is a tool to moderate cost pass-through and keep inflation on target. Senior Deputy Governor Carolyn Rogers added that a lower rate might support investment incentives, but only if it does not lead to higher inflation.

Mackell emphasized that the central bank operates independently of fiscal policy and does not see the current government spending as unsustainable or contradictory to its inflation-control mandate. Conservative finance critic Michael Chong’s question about affordability efforts received a non-committal response, with Mackell stating he comments on fiscal policy only when spending becomes excessive or undermines the bank’s objectives.

The exchange highlighted the interplay between monetary policy and the upcoming budget, while reaffirming the bank’s focus on containing inflation amid elevated energy costs.