Bank of Canada Governor Tiff Macklem has raised concerns about the increasing risk of inflation, highlighting that surging energy costs and Canada’s new counter-tariffs on U.S. goods could be key drivers of higher 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, a move that was widely anticipated by economists. The central bank had lowered the rate to its current level in October last year, and this decision marks the seventh consecutive time it has kept the rate unchanged.
Addressing reporters in Ottawa, Macklem pointed out that the tariffs imposed by the U.S. and the counter-tariffs from Canada could increase costs for certain businesses. However, he emphasized that the larger concern is the escalating conflict in the Middle East, which has led to a resurgence in oil prices. He warned that if the conflict persists, it could eventually impact the prices of various goods and services.
The central bank noted that recent data supports its forecast of a strengthening economic recovery. Nevertheless, policymakers expressed concerns about the potential for higher inflation due to the ongoing war in the Middle East and the tariffs imposed by the U.S.
Meanwhile, the Canada-U.S. trade dispute has intensified, with U.S. President Donald Trump imposing significant tariffs on Canadian products, prompting Canada to reciprocate with dollar-for-dollar tariffs on U.S. goods. The Canadian government has introduced a $7.5-billion expanded economic relief program to assist affected workers and businesses, in addition to the previous tariff support measures implemented.
Canada’s inflation rate rose to three per cent in July, primarily driven by increased gasoline prices influenced by the Middle East tensions. Macklem reiterated the bank’s goal of achieving a two per cent inflation rate and highlighted the impact of the conflict in Iran on oil prices.
Looking ahead, economists are closely monitoring developments in the energy market, trade relations, and geopolitical tensions. Analysts predict potential rate hikes totaling 75 basis points starting in the fourth quarter of 2026, depending on various economic factors.
The uncertainties surrounding trade relations have led to heightened market volatility, impacting bond yields in both Canada and the U.S. While the Bank of Canada maintains control over short-term borrowing costs, global market dynamics and geopolitical risks continue to influence long-term rates. The central bank officials remain vigilant about potential risks in the financial system, emphasizing the importance of stability amid changing market conditions.
The benchmark 10-year Government of Canada bond yield rose above basis points to 3.80 per cent on Wednesday, reaching its highest level in over two years. A recent Reuters poll of economists indicated unanimous expectations that the Bank of Canada would keep its key rate unchanged in this announcement. The next rate announcement is scheduled for Oct. 28.