Odds of a Bank of Canada rate hike in December rise with oil in the inflation ‘driver’s seat,’ say economists

Cooler core inflation will give the Bank of Canada some breathing space for rates that other central banks don't have, said one economist. Photo by HYUNGCHEOL PARK/Postmedia

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The price of oil has risen 15 per cent in September to top US$100 a barrel after spending the summer months between US$80 and US$85.

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Gas pump prices rose 22.8 per cent in August from a year ago, compared with 25.7 per cent in July, Statistics Canada said, keeping inflation at the top end of the Bank of Canada’s target zone of one per cent to three per cent.

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Here’s what economists had to say about inflation and what’s next for the Bank of Canada and interest rates.

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No comfort: Desjardins

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“While inflationary pressures looked relatively contained in August, Bank of Canada officials won’t take much comfort with oil prices above $100 per barrel,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note on Monday.

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He said moderating gas prices “temporarily” contained inflation in August at three per cent, matching economists’ expectations.

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Excluding gas and food, the consumer price index (CPI) rose to 2.1 per cent in August from 1.9 per cent in July. The Bank of Canada’s preferred measures of core inflation, CPI trim and median, came in at a 12-month rate of two per cent.

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Cooler core inflation will give the Bank of Canada some breathing space that others such as the European Central Bank, which hiked rates by 25 basis points last week after increasing them in June, don’t have.

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But Mendes said if oil prices don’t start falling soon, policymakers won’t have any choice but to hike because rising prices for oil and gasoline will show up in other areas of the economy over the next few months.

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“For monetary policy, oil is now in the driver’s seat,” he said.

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‘Odds rise’: RSM Canada

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“The odds of a hike in December rose slightly,” Tu Nguyen, an economist at RSM Canada LLP, said in a note, adding that the longer the war in Iran lasts, the more likely inflation will break out beyond the gas pumps.

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“The Bank of Canada cannot control energy prices,” he said.

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RSM expects annual inflation to accelerate past three per cent in September, though core measures will be held in check by tamer home prices and food.

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Food inflation for August undershot the overall CPI for the first time since July 2024.

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RSM is calling for the Bank of Canada to hold rates at 2.25 per cent for the remainder of 2026 before hiking in the first quarter of 2027.

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Labour slack persists: Normura

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“Underlying price pressures remained contained,” Ruchir Sharma, an economist at Normura Securities International, said in a note.

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The Bank of Canada’s preferred core inflation measures of trim and median averaged 1.95 per cent year over year in August, the same as July, while the number of categories in the CPI basket that rose to or higher than three per cent remained “benign,” he said.