Bank of Canada Governor Tiff Macklem has highlighted the increasing risk of inflation, pointing to rising energy costs and incoming tariffs on U.S. goods as potential drivers of price hikes for consumers and businesses in Canada. Macklem’s comments followed the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with expectations. The bank has kept its policy rate unchanged for the seventh consecutive time since lowering it in October last year.
Macklem stated that the tariffs, particularly those on U.S. products, will impose additional costs on some businesses, although they apply to a limited range of goods. He emphasized that the ongoing conflict in the Middle East poses a greater concern, as it has led to an increase in oil prices. The bank acknowledged recent data indicating a broadening economic recovery but cautioned that the war and trade tensions with the U.S. could heighten inflation risks.
Oil prices have surged around 13% since the last bank announcement in July, attributed in part to the escalating conflict in Iran. The Canada-U.S. trade dispute has also escalated significantly, with President Trump imposing tariffs on Canadian products, reciprocated by Canada with equivalent tariffs on U.S. goods.
To address the economic impact of the tariffs, the Canadian government has introduced a $7.5 billion expanded relief program for affected workers and businesses. The recent rise in Canada’s inflation rate to three per cent in July, driven by Middle East tensions affecting oil prices, has raised concerns for Macklem, who aims for a two per cent inflation target.
Economists, including Derek Holt from Scotiabank, anticipate potential rate hikes starting in the fourth quarter of 2026 based on forthcoming economic forecasts. CIBC chief economist Avery Shenfeld emphasized the uncertainties surrounding trade relations, suggesting that current trade tensions could hinder rate changes in the near future.
While the Bank of Canada manages short-term borrowing costs, longer-term rates are influenced by the bond market. Market volatility and global yield movements are being closely monitored, with Canadian bond yields following U.S. treasury trends. The benchmark 10-year Government of Canada bond yield reached a two-year high of 3.80 per cent, reflecting market dynamics and expectations. Economists polled anticipate the bank to maintain its key rate in the upcoming October announcement.