Bank of Canada 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. Macklem made these comments following the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 per cent, in line with expectations from economists. The bank has kept its policy rate unchanged for the seventh consecutive time since lowering it last October.
Macklem highlighted the impact of counter-tariffs and the ongoing conflict in the Middle East on the economy. He emphasized that the war has led to a resurgence in oil prices, which could potentially spill over into the prices of other goods and services, posing a significant inflationary risk.
Despite recent data indicating a broadening economic recovery, the bank noted the potential inflationary pressures arising from the Middle East conflict and U.S. tariffs. Oil prices have surged approximately 13 per cent since the previous announcement in July due to the escalated conflict in Iran, leading to disruptions in tanker traffic through the critical Strait of Hormuz.
The trade tensions between Canada and the U.S. have escalated, with President Donald Trump imposing tariffs on Canadian products, prompting Canada to retaliate with equivalent tariffs on U.S. goods. In response to the economic impact of these tariffs, the Canadian government unveiled a $7.5 billion expanded relief program for affected workers and businesses.
Macklem expressed concern over the recent increase in Canada’s inflation rate to three per cent in July, primarily driven by higher gasoline and oil prices influenced by the Middle East conflict. He emphasized the bank’s goal of achieving two per cent inflation and the need to monitor economic forecasts closely.
The decision to maintain the interest rate was seen as a prudent move amidst growing uncertainties over trade relations and the potential impact of tariffs. Analysts anticipate minimal changes in the interest rate for the remainder of 2026, with factors such as oil prices and trade dynamics likely to influence future monetary policy decisions.
While the Bank of Canada can control short-term borrowing costs, longer-term rates are determined by the bond market. Global bond market volatility, driven by expectations of rate hikes by the U.S. Federal Reserve, has influenced Canada’s bond yields. The bank remains vigilant about market stability and liquidity, especially with the benchmark 10-year Government of Canada bond yield reaching its highest level in over two years.
Economists polled expect the Bank of Canada to maintain its key rate during the next announcement on October 28, reflecting the cautious approach amid ongoing economic uncertainties.
