Bank of Canada Chief Credits AI Boom for Holding Up Growth as Oil Shock Forces a Rate Decision

On Wednesday the Bank of Canada decides whether to raise its benchmark interest rate from 2.25 percent. Most of the 34 economists in a Reuters poll taken Oct. 21 to 23 expect Tiff Macklem, the governor, to raise it by a quarter point, to 2.50 percent.¹

Two weeks ago in Bangkok, during the International Monetary Fund and World Bank annual meetings, Mr. Macklem laid out how he sees Canada’s economy.² In a public conversation with Tim Adams, president and chief executive of the Institute of International Finance, he said an artificial intelligence boom is carrying global growth against the pull of trade fragmentation and war in the Middle East. He also said oil is testing how long that can last.

The Oil Shock

Oil is already affecting the numbers.

Canadian inflation rose to 3.1 percent in September from 3 percent in August, slightly above the top of the bank's 1 to 3 percent target range. Without gasoline it was 2.2 percent. Gasoline was up 27.8 percent from a year earlier.³⁴ Brent crude touched $117 a barrel on Oct. 23, its highest since May.¹

Mr. Macklem told Mr. Adams that the last forecast, in July, assumed oil prices would come down. They have not. Governments have released strategic reserves, he said, and China holds large reserves of its own that are not reaching the market. Reserves can be released only so many times, though, and "at some point China has to come back into the market." If nothing improves, he said, the situation could get worse. The Hub, a Canadian news site, reported the bank's July forecast assumed Brent at about $75.³

So far, he said, higher crude has not passed through much into other goods and services in most countries. Diesel and gasoline are pricier than crude alone would imply because refining margins have widened after damage to refining capacity, and the longer that lasts, the more of the cost has to land somewhere else. Canada, an oil exporter, gains revenue from higher prices, he said. But every Canadian filling a tank pays the price that the world decides, and anyone whose tractor runs on diesel feels it.

A Decision Pending

He did not say what the bank would do.

Three days later, on a conference call with reporters from Bangkok on Oct. 17, he said the bank would raise its inflation forecast "significantly" and that "the risk that inflation broadens and becomes more persistent has gone up," according to Reuters.⁵ He framed the decision as a question. Whether inflation is likely to come back to the target on its own, or whether the bank has to raise rates to influence the path. Futures pricing for an October increase, about 30 percent before the call, had risen to roughly three in four by the time of the Reuters poll, according to that survey.¹

A Cooling Economy

The economists are not unanimous.

RBC expects the bank to hold through the end of 2026.⁶ And the case against a hike sits in the labor data. Canada lost 68,000 jobs in September after losing 42,000 in August, and the unemployment rate rose to 6.5 percent, Statistics Canada reported.⁷ The labor force participation rate fell to 64.8 percent, the lowest in 29 years outside the pandemic, according to BNN Bloomberg.⁸ Wage growth was 2.3 percent. The median forecast in the Reuters poll has the economy growing 1.0 percent this year.⁹

That is a long way from the second quarter, when real gross domestic product rose at an annualized 3.3 percent, the fastest since early 2023 and above the bank's 2.5 percent forecast.¹⁰

Mr. Macklem pointed to that period when he talked about AI.

Second-quarter investment data show businesses recognizing, even amid "a difficult period with high trade tensions with our biggest trading partner," that AI "is not going away," he said; they described it as a long game. Business investment rose for the first time in six quarters, helped by purchases of data-center processing units.¹⁰

Tariffs in the Background

Tariffs levied by the United States are also hurting the Canadian economy. Mr. Macklem did not single them out, and the evidence is mixed.

In April, the bank estimated that industries facing sector-specific American tariffs account for about 1 percent of Canadian output and employment but roughly 15 percent of exports. Steel exports, under a 50 percent tariff, had roughly halved; softwood lumber exports were about 20 percent below 2024 levels by February.¹¹ The Parliamentary Budget Officer said on Oct. 20 that trade measures since early 2025 could lower the level of real GDP by 1.4 percent after five years, and cut employment by as much as 185,000 jobs, or 0.9 percent, if the tariffs become permanent. The same note found non-U.S. merchandise exports 51 percent above their 2024 monthly average as of August, and said firms appear to be adapting faster than its model assumes.¹² Economists told BNN Bloomberg that September's job losses were concentrated in public services, not in tariff-exposed sectors, and that the tariffs are unlikely to move employment data much in coming months.⁸ New 50 percent U.S. tariffs on a range of Canadian goods took effect Aug. 22.¹⁰ The White House's National Economic Council director, Kevin Hassett, said on Oct. 25 that talks were "very close" to a deal, according to one outlet's account. Neither the tariff rates nor that quote could be confirmed independently.¹³

AI and Financial Stability

Asked about the artificial intelligence boom itself, Mr. Macklem said the transition could be disruptive and that no one yet knows who wins and loses. He said equity prices look stretched by some measures. His larger worry was financial plumbing. As chair of the Financial Stability Board's committee that assesses global vulnerabilities, a post he took in March 2025, he said banks face cyber risk, concentration in a few shared providers, and correlation.¹⁴ "If everybody's using the same AI, and everybody comes to the same answer on the same day," he said, markets could move sharply. He also said people panic and AI could, in principle, behave more rationally. And he said the benefits will not arrive "if we don't understand the risks and we don't mitigate those risks."

On bank capital rules, he said three-quarters of the Basel Committee's 27 member jurisdictions have published rules for the final Basel III standards, a figure the Bank for International Settlements repeated on Oct. 5.¹⁵ Publishing is not implementing, he said, and some important jurisdictions have more work to do.

"Let's not count our chickens before they fully hatch."

Sources

1. Reuters poll via IndexBox, "Bank of Canada expected to raise rates to 2.50% on October 28," survey of 34 economists, Oct. 21-23. indexbox.io
2. IMF, 2026 Annual Meetings, Bangkok, Oct. 12-18. imf.org
3. The Hub, "Macklem signals higher inflation forecast as oil shock tests Bank of Canada's hold," Oct. 19, 2026. thehub.ca
4. MoneySense, "Bank of Canada interest rate forecast: What to expect on October 28." moneysense.ca
5. Reuters, "Bank of Canada sees sharply higher inflation outlook as oil surges, Macklem says," Oct. 17, 2026, via Yahoo Finance Canada. ca.finance.yahoo.com
6. MoneySense (RBC and Desjardins views), as above.
7. Statistics Canada, The Daily, Labour Force Survey, September 2026, Oct. 9, 2026. statcan.gc.ca
8. BNN Bloomberg, "Canada's 2026 job gains have been erased," Oct. 9, 2026. bnnbloomberg.ca
9. FXStreet, "BoC seen hiking, markets look for hawkish signals," Oct. 26, 2026. fxstreet.com
10. Advisor.ca, "Economy grew 3.3% annualized in Q2," on Statistics Canada's Aug. 28 release. advisor.ca
11. Bank of Canada, Monetary Policy Report, April 2026, "One year later: assessing the impact of US trade restrictions on Canadian industries." bankofcanada.ca
12. Parliamentary Budget Officer, Economic and Fiscal Outlook Assessment Note, Oct. 20, 2026. pbo-dpb.ca
13. Hashtag Investing, "Trump official says Canada still hasn't offered enough," Oct. 26, 2026. hashtaginvesting.com
14. Investment Executive, "FSB taps BoC's Macklem to head oversight group." investmentexecutive.com
15. Bank for International Settlements, "Basel III applicable in almost all member jurisdictions by 2027," Oct. 5, 2026. bis.org