Bank of Canada Governor Tiff Macklem signaled on Monday that the central bank remains prepared to increase interest rates if elevated energy prices and inflation prove persistent. Speaking before the House of Commons finance committee, Macklem emphasized the uncertain economic outlook stemming from the ongoing conflict in the Middle East, specifically the war involving Iran, and its potential to influence inflationary pressures in Canada.

Macklem reiterated the Bank of Canada’s commitment to maintaining inflation near its two percent target over time, but acknowledged that uncertainty is currently “unusually elevated” with multiple possible scenarios. He stressed that monetary policy may need to be flexible to respond to evolving conditions, including the possibility of raising interest rates if inflation begins to spread beyond energy costs to other sectors of the economy.

“At present, inflation appears concentrated in energy prices, and core inflation remains relatively anchored,” Macklem said. However, he warned that sustained high energy prices could lead to a broader rise in prices across goods and services, resulting in generalized inflation. “There’s a risk that those higher energy prices start to feed into other goods and services, and then those feed into yet more goods and services,” he explained.

The governor acknowledged the burden that higher interest rates impose on Canadians but maintained that allowing inflation to become entrenched would cause greater harm. His remarks followed the Bank of Canada’s decision on Wednesday to hold its policy interest rate steady at 2.25 percent for the fourth consecutive meeting. The bank also highlighted significant uncertainty stemming from the Middle East conflict in its latest Monetary Policy Report.

Inflation in Canada had remained close to the two percent target for more than a year but ticked up to 2.4 percent in March, after dipping to 1.8 percent in February. The Bank of Canada’s current projection anticipates inflation peaking at about three percent in April before gradually returning to two percent by early 2027, assuming a decline in global oil prices.

A recent survey conducted by the Bank of Canada found that most Canadians expect the Iran war to weaken the economy and push prices higher. Nonetheless, the central bank reported little evidence so far that elevated energy prices have triggered a broader inflationary spread.

Senior Deputy Governor Carolyn Rogers, who also testified on Monday, noted the bank is closely monitoring indicators that might signal inflation becoming more widespread, including food prices, which climbed 4.4 percent year-over-year in March. Rogers observed that food price volatility is influenced by multiple factors, including energy costs and the need to import certain products into Canada.

Macklem underlined that it is currently too soon to determine whether inflation pressures are broadening beyond energy-related items. He said the timing and extent of any inflation spread depend heavily on future developments in global oil prices and how businesses respond to elevated costs.

“There is a clear affordability question in this country,” Macklem said, referencing the lingering effects of price increases sustained since the COVID-19 pandemic. While the Bank of Canada cannot directly control food and energy prices, Macklem emphasized its role in preventing inflation from becoming persistent and entrenched in the broader economy.