BMO sees inflation above 3% in April as oil shock tests Bank of Canada’s patience
Oil has surged past US$100 a barrel on the back of the war in Iran, inflation risks are rising, and yet the Bank of Canada is still sitting on a 2.25 percent policy rate.
According to the Financial Post, a summary of the governing council’s March 18 deliberations shows policymakers focused heavily on “soaring oil prices stemming from the war in Iran” and how they could feed into inflation, especially through gasoline and groceries.
The summary warned that “higher gasoline prices, combined with still-elevated inflation in essentials such as groceries, could push up inflation expectations,” with high inflation in 2022–23 “fresh in people’s minds.”
Even so, the council judged it was too early to know how the shock would evolve and held the overnight rate.
The Financial Post reported that the council agreed to “look through” the oil shock’s immediate impact on headline inflation and instead guard against it triggering broader, persistent price increases.
Members said they had “some flexibility” because inflation sat close to target and core measures showed “limited pressures,” giving them time to watch how the war in Iran evolved and what it meant for the outlook.
Reuters said the minutes underline that judgment, not strict model rules, will dominate decisions.
The outlet reported, citing the summary, that the seven‑member rate‑setting council “acknowledged that they would need to rely on judgment more heavily than usual and take a risk management approach to monetary policy.”
The Bank of Canada has kept its policy rate at the lower end of its neutral range since October, while inflation has stayed near the mid‑point of its 1 to 3 percent target band for almost a year.
Governor Tiff Macklem said the governing council would “look through the Iran war’s immediate impact on inflation” but respond if inflation turned persistent.
Council members agreed the energy price shock would lift inflation in the near term, but said the broader economic impact remained uncertain.
Reuters also reported that money markets are pricing in two rate hikes in the second half of the year after US President Donald Trump signalled the conflict could end in “two to three weeks.”
On the street, most economists still see the bank holding rates despite the oil‑driven bump in inflation.
BNN Bloomberg reported that BMO chief economist Doug Porter said Canada has just seen “the largest monthly gasoline price hike on record,” but noted that, after inflation, oil prices are roughly back at their 2005–2015 range and that “the global economy can certainly manage US$100 oil.”
BMO expects higher oil prices to push inflation from 1.8 percent in February to a little above 3 percent in April, but Porter does not think that will be enough to move the Bank of Canada.
He said they have been consistent in their view that the Bank of Canada is on hold and that he still expects that outcome, adding that “the bar will be very high for the Bank of Canada to be raising interest rates in this environment.”
BNN Bloomberg reported that BMO’s base case assumes some resolution to the Iran war that allows oil to average between US$80 and US$85 a barrel for the year.
Randy Ollenberger, managing director of oil and gas research at BMO Capital Markets, said “the main message” from markets is that this conflict “is going be over relatively quickly.”
He said many expect shipping flows to normalise by the end of April and that, even then, oil will likely carry a risk premium of at least US$10 a barrel above pre‑conflict levels.
The real‑economy impact is already visible in fuel‑intensive sectors.
CBC News reported that, as the war in the Middle East continues and crude trades well above US$100, airlines, shipping companies and rideshare platforms have introduced or raised fuel‑related charges.
An International Air Transport Association analysis showed the weekly average jet fuel price for the week ending March 27 was 116.8 percent higher than the previous year’s average, prompting carriers to add fees to tickets.
CBC News said Air Canada Vacations has imposed a $50‑per‑passenger fuel surcharge on all warm‑weather destinations for new bookings as of April 6.
Porter Airlines has introduced a temporary $40 “peak surcharge” on all flights redeemed through its VIPorter membership as of March 23, while Air Transat is charging $50 on flights leaving Canada about $40 on flights departing Europe.
WestJet told CBC News it adjusts fares when fuel prices rise, but did not specify by how much.
For consumers, higher pump prices are biting directly.
The average gasoline price in Canada was $1.76 per litre as of Tuesday, up 22 cents from the same time last year, according to GasBuddy.
Shipping and courier firms such as Canada Post, FedEx, UPS and Purolator have also lifted fuel surcharges, with CBC News detailing sizeable percentage add‑ons on domestic and international shipments through early April.
Against that backdrop, the growth data look slightly better than expected but hardly booming.
According to the Financial Post, Statistics Canada said GDP rose 0.1 percent month over month in January, with a flash estimate of 0.2 percent for February.
Economists now see first‑quarter annualized GDP growth in the 1.4 to 1.8 percent range, roughly in line with the Bank of Canada’s forecast, but several, including David Rosenberg and Katherine Judge, told the Post the economy is still expanding below trend and remains vulnerable to higher oil prices and trade uncertainty.
For now, that leaves the Bank of Canada trying to ride out a war‑driven energy shock and uneven growth path without touching rates — and investors watching closely to see whether “looking through” higher oil proves enough to keep inflation anchored.
