The Bank of Canada is likely to hike interest rates for the first time in more than three years as policymakers grow increasingly concerned about the inflation risk posed by the cost of energy.

Markets and the majority of economists at Canada’s largest banks expect policymakers to increase the overnight rate to 2.5% on Wednesday.

Since September, Governor Tiff Macklem has made it clear that the central bank is worried about higher oil prices from the conflict in the Middle East bleeding through to the prices of other goods and services. There’s little evidence of that happening just yet. But there’s also no resolution in sight for the war in Iran, and oil prices are almost as high as they were in the early weeks of the conflict.

As of Monday evening, Brent crude was trading around $115 a barrel. The longer prices stay that high, the greater the chance inflation pressures spread. As a major energy exporter, Canada also gets an economic boost from higher prices, particularly in the western provinces.

That makes it harder for policymakers to keep looking past the supply shock. If they were to wait for clearer evidence that inflation is getting entrenched, they would risk falling behind the curve for the second time in five years. The BOC, like most central banks, held rates steady through 2021 and was caught offside by a post-pandemic surge in prices.

“Canadians need to get ready for higher interest rates because inflation risks are still alive and well, and the economy, the way the Bank of Canada sees it, is capable of absorbing it,” Frances Donald, chief economist at Royal Bank of Canada, said in an interview.

The economy is still struggling to find its footing. The labor market has shed jobs two months in a row, while US tariffs and reduced immigration are creating headwinds for some sectors.

But policymakers appear to be less worried now about some of those downside risks. The bank has said the damage from the escalation in trade tensions will largely be concentrated in a small number of sectors.

Macklem, speaking to reporters Oct. 17 after meetings in Bangkok, made hawkish comments — including an acknowledgment that higher oil prices boost revenues, investment and incomes in energy-producing parts of the country, even as consumers and businesses are squeezed by higher energy costs. That pushed traders to quickly price in a hike this month.

Fiscal policy is also helping to cushion the economy. Prime Minister Mark Carney’s government has reduced taxes on gasoline, and, along with Ontario’s government, provided relief programs to manufacturing sectors hit hard by tariffs.

Throughout the trade disputes, Macklem and the bank have argued that governments are better positioned to help households, industries and regions being hurt most by tariffs. The central bank can only set short-term borrowing costs based on broader economic conditions.

Some provinces, like Ontario, Quebec and British Columbia, are being hit by tariffs and the slower housing market, while oil-rich provinces like Alberta and Saskatchewan are benefiting from higher energy and commodity prices. “If there was a central bank of Calgary, rate hikes should probably already be in motion, but if there’s a central bank of Windsor, Ontario, they should be cutting right now,” Donald said.

Housing activity remains subdued and prices are still sliding in some markets. But Senior Deputy Governor Carolyn Rogers reminded people in a recent speech that the central bank doesn’t set interest rates just for the housing market.

Headline inflation has been stuck around 3% for months because of elevated gasoline prices. Core inflation has held near the central bank’s 2% target so far, and there’s scant evidence higher energy costs are feeding through more broadly.

There are other signs that could worry officials if the conflict in the Middle East continues. The bank’s surveys show consumers’ longer-term inflation expectations have ticked higher, while companies increasingly expect to pass higher input costs on to their customers.

Derek Holt, an economist with Bank of Nova Scotia, doubts the bank will clearly signal where Canadian borrowing costs are headed after this week.

“Macklem hates explicit guidance and tends to speak in cryptic, somewhat cagey ways, at least ever since he overreached on forward guidance in the pandemic,” he said.

“If the Bank of Canada rate decision on Wednesday were a television show, it would be ,” Ian Pollick, global head of fixed income, currency and commodities strategy at Canadian Imperial Bank of Commerce, said by email. He expects the central bank to follow up a hike this week with another in December.

“The reality is that headline inflation is too high, and the persistence of the energy shock has gone on too long,” he said, adding that raising borrowing costs while sounding dovish would be “silly.”Macklem and Rogers will speak to reporters at 10:30 a.m. Ottawa time, after the decision.

The decision also includes new estimates for growth and inflation and details from Prima, the bank’s new forecasting model.