Bank of Canada’s Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, citing rising energy costs and incoming tariffs on U.S. goods as potential drivers of higher prices for consumers and businesses in Canada.
Following the central bank’s decision to maintain its benchmark interest rate at 2.25 percent, Macklem highlighted the impact of tariffs on businesses, emphasizing the potential cost implications. He also pointed out that the ongoing conflict in the Middle East, leading to a rise in oil prices, poses a significant risk of spillover effects on the prices of other goods and services.
The Bank of Canada acknowledged recent data confirming a broadening economic recovery but noted the elevated risks of inflation due to the war and tariffs. U.S. oil prices have surged approximately 13 percent since the previous announcement, attributed to the intensified conflict in Iran affecting global oil markets.
The escalating Canada-U.S. trade war saw President Trump imposing hefty tariffs on Canadian products, reciprocated by Canada with matching tariffs on U.S. goods. In response, the Canadian government unveiled a $7.5 billion economic relief program for affected workers and businesses, adding to the previous tariff support measures.
Macklem labeled the current inflation rate of three percent in July as “too high,” primarily driven by gasoline and oil prices influenced by the Middle East conflict. Analysts anticipate the Bank of Canada’s forthcoming economic forecasts in October to guide future policy decisions, with expectations of rate hikes starting in the fourth quarter of 2026.
The uncertainties surrounding trade relations amid the ongoing trade war have clouded the economic outlook, according to CIBC’s chief economist Avery Shenfeld. He emphasized the impact of trade uncertainties on economic projections and the potential lack of rate changes in 2026 due to volatile oil and trade dynamics.
While the Bank of Canada controls short-term borrowing costs, longer-term rates in the bond market have seen significant movements, influenced by global trends. Macklem highlighted the distinction between market volatility and instability, emphasizing the importance of monitoring investor risk repricing to prevent financial market disruptions.
The 10-year Government of Canada bond yield surged to 3.80 percent, its highest level in over two years, reflecting the broader market sentiment. Economists in a Reuters poll expect the central bank to maintain its key rate in the upcoming announcements, scheduled for October 28.