Bank of Canada’s Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, highlighting rising energy costs and Canada’s retaliatory tariffs on U.S. goods as potential factors driving up prices for consumers and businesses.
Macklem’s comments followed the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with expectations. The bank had reduced the rate to its current level last October, marking the seventh consecutive meeting without a change in the policy rate.
Addressing reporters in Ottawa, Macklem acknowledged the impact of tariffs on businesses, emphasizing the potential cost implications, particularly due to the ongoing conflict in the Middle East. He cautioned that prolonged hostilities could lead to broader price increases across various goods and services.
The central bank emphasized a positive economic outlook with evidence of a broadening recovery. However, it also highlighted the risks posed by the Middle East conflict and U.S. tariffs, which could contribute to higher inflation rates.
U.S. oil prices have surged by approximately 13% since the bank’s previous announcement in July, partly attributed to heightened tensions in Iran. The ongoing conflict has disrupted oil supply routes, affecting global markets.
Against the backdrop of escalating trade tensions, both Canada and the U.S. have imposed significant tariffs on each other’s goods. Canada recently matched U.S. tariffs on Canadian products, further intensifying the trade dispute.
In response to the economic impact of tariffs, the Canadian government unveiled a $7.5 billion expanded relief program to support affected workers and businesses, supplementing the existing tariff support initiatives.
Macklem expressed concerns about the elevated inflation rate, which reached three per cent in July, primarily driven by increased gasoline prices resulting from the Middle East conflict. The Bank of Canada aims to maintain a two per cent inflation target.
Economists anticipate the bank’s forthcoming economic forecasts in October to guide future policy decisions. There are expectations of rate hikes totaling 75 basis points starting in the fourth quarter of 2026.
Amid uncertainties surrounding trade relations, CIBC’s chief economist Avery Shenfeld emphasized the challenges posed by the ongoing trade war and the potential impact on economic outlook. Shenfeld highlighted the need for clarity on trade policies to mitigate uncertainties affecting the economy.
While short-term borrowing costs are within the bank’s control, long-term rates are influenced by the bond market. Macklem noted the impact of global bond yield movements on Canada’s market, emphasizing the importance of monitoring market risks and investor behavior.
The benchmark 10-year Government of Canada bond yield reached a two-year high at 3.80 per cent, reflecting market dynamics and investor sentiment. Economists surveyed expect the Bank of Canada to maintain its key rate in the upcoming rate announcement on October 28.