Bank of Canada Governor Tiff Macklem has highlighted a growing inflation risk, pointing to increased energy costs and incoming tariffs on U.S. goods as potential drivers of rising prices for consumers and businesses in Canada. Macklem made these comments following the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with economists’ expectations. The bank has kept this rate unchanged for seven consecutive times.
Macklem emphasized the impact of counter-tariffs and U.S. tariffs on businesses, stating that while these tariffs are substantial, they apply to a limited range of products. He expressed more concern over the conflict in the Middle East, stating that the re-escalation of the conflict has led to higher oil prices, posing a risk of spillover effects on prices of other goods and services.
Despite recent data indicating a broader economic recovery, the bank acknowledged that the ongoing war in the Middle East and U.S. tariffs could elevate the risk of inflation. Benchmark oil prices in the U.S. have surged approximately 13 per cent since the bank’s last announcement in July due to the intensified U.S.-led war in Iran affecting tanker traffic through the Strait of Hormuz.
The Canada-U.S. trade dispute has escalated, culminating in U.S. President Donald Trump imposing significant tariffs on Canadian products, matched by Canada with equivalent tariffs on U.S. goods. To support affected workers and businesses, the Canadian government unveiled a $7.5 billion expanded economic relief program, supplementing the existing tariff support of nearly $25 billion over the past 18 months.
Macklem expressed concern over Canada’s inflation rate reaching three per cent in July, primarily driven by higher gasoline prices influenced by the Middle East conflict. The central bank aims to achieve two per cent inflation and is closely monitoring future economic forecasts due in October.
CIBC chief economist Avery Shenfeld noted the uncertainties surrounding trade relations amid the ongoing trade war and predicted little likelihood of a rate change in 2026 due to fluctuating oil and trade war scenarios. While the Bank of Canada influences short-term borrowing costs, longer-term rates are dictated by the bond market, with Canadian yields below U.S. treasury yields.
The benchmark 10-year Government of Canada bond yield rose to 3.80 per cent, its highest level in over two years, reflecting global bond yield trends. Economists anticipate the Bank of Canada to maintain its key rate at the next announcement on Oct. 28, based on a Reuters poll.
