BoC flags rate risk from persistent fuel costs

The Bank of Canada’s governing council has warned that it may need to raise interest rates if elevated gasoline prices begin to pass through to other goods and services. Minutes from the latest policy meeting describe persistently high gasoline costs as a key source of upside risk to inflation, even though broad-based pass-through into non-energy prices has not yet been clearly observed.

Council members noted that high fuel costs can eventually affect transportation, production, and distribution expenses, which in turn risk pushing up prices for a wider range of consumer items. They indicated that, should such spillovers materialize more broadly in the consumer price index, a monetary policy response would be required to prevent inflation from becoming entrenched.

The minutes point to several factors keeping gasoline and diesel prices elevated. Policymakers cited conflict in Iran and broader tensions in the Middle East as having raised market expectations for oil prices, contributing to sustained pressure at the pump.

In addition to geopolitical tensions, the governing council identified damage to refining capacity as a constraint on fuel supply. This disruption was seen as another driver keeping gasoline and diesel prices high, compounding the impact of higher crude benchmarks.

The minutes also mention trade actions and new tariffs across the U.S. border as additional cost pressures. These measures were viewed as factors that could increase input costs for businesses and potentially be passed on to consumers through higher prices, further complicating the inflation outlook.

Policymakers assessed that the combination of prolonged Middle East tensions, refining constraints, and cross-border trade measures could keep fuel prices elevated for longer than previously projected. They warned that these conditions might push headline inflation higher, and for a longer period, than envisaged in the Bank’s July forecast.

While the minutes acknowledge limited evidence so far of a broad pass-through from energy to non-energy components of inflation, they emphasize the risk that such spillovers could intensify over time. The governing council stated that, if higher energy prices begin to significantly affect other consumer price index components, interest-rate hikes would be necessary to maintain control over inflation dynamics.