Bank of Canada Governor Tiff Macklem has raised concerns about the increasing risk of inflation, particularly due to rising energy costs and the impact of dollar-for-dollar tariffs on U.S. goods. Macklem’s comments followed the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with economists’ expectations. The bank has kept its policy rate unchanged for the seventh consecutive time since lowering it in October last year.
Macklem emphasized that the tariffs imposed by the U.S. and Canada will impose additional costs on businesses, although they are applied to a limited range of products. He highlighted the escalating conflict in the Middle East as a major factor affecting oil prices, warning that prolonged tensions could lead to broader inflationary pressures.
Despite affirming a strengthening economic recovery based on recent data, the central bank acknowledged the potential inflation risks posed by the ongoing war and trade tensions. The surge in U.S. benchmark oil prices following recent events in Iran has further heightened concerns about inflationary pressures.
In response to the escalating trade disputes, Canada announced matching dollar-for-dollar tariffs on U.S. goods in retaliation for U.S. tariffs imposed by President Donald Trump. The federal government introduced a $7.5 billion economic relief program to support affected workers and businesses, supplementing the existing tariff support measures.
Macklem expressed unease about the current inflation rate, which reached three per cent in July, exceeding the bank’s target of two per cent. He attributed this inflation spike primarily to increased gasoline and oil prices influenced by the conflict in Iran. Analysts, including Derek Holt from Scotiabank, anticipate potential rate hikes of 75 basis points starting in the fourth quarter of 2026, pending economic developments.
The uncertainties surrounding trade relations and the potential impacts on inflation have led to cautious monetary policy decisions by the Bank of Canada. While the bank noted modest direct impacts from recent tariffs, it highlighted the overall uncertainty and drag on the economy caused by trade tensions.
As global bond yields rise, impacting longer-term rates, the Bank of Canada closely monitors the situation. Macklem emphasized the importance of distinguishing between market volatility and instability, noting the current absence of significant risks related to rapid unwinding of leveraged positions and liquidity issues. The benchmark 10-year Government of Canada bond yield rose to 3.80 per cent, the highest level in over two years.
In conclusion, the Bank of Canada’s decision to maintain the key rate was widely anticipated by economists, with the next rate announcement scheduled for October 28. The ongoing economic and geopolitical developments continue to shape the bank’s approach to monetary policy.