Bank of Canada Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, pointing to 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 central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, which was in line with economists’ expectations. The bank has kept its policy rate unchanged for the seventh consecutive time since lowering it in October last year.
Macklem highlighted the impact of counter-tariffs and the ongoing war in the Middle East on inflation. He emphasized that the conflict in the Middle East, leading to a surge in oil prices, poses a significant risk of spilling over to affect prices of other goods and services. The recent data confirms the bank’s forecast of a “broadening recovery” in the economy, but policymakers are wary of the potential inflationary effects of the war and tariffs.
The escalation of the Canada-U.S. trade war has further compounded the economic situation. President Donald Trump imposed significant tariffs on Canadian products, prompting Canada to retaliate with corresponding tariffs on U.S. goods. To support affected workers and businesses, the Canadian government unveiled a $7.5 billion economic relief program in addition to existing tariff support measures.
Canada’s inflation rate rose to three per cent in July, driven by increased gas prices linked to the Middle East tensions. Macklem expressed concern over the high inflation rate, emphasizing the bank’s target of achieving two per cent inflation. Analysts anticipate potential rate hikes starting in the fourth quarter of 2026, with uncertainties over trade relations and global economic conditions clouding the outlook.
While the Bank of Canada monitors short-term borrowing costs, longer-term rates are influenced by the bond market. The benchmark 10-year Government of Canada bond yield reached its highest level in over two years, reflecting global bond yield trends. Despite market volatility, bank officials are cautious about potential risks associated with rapid investor actions and liquidity constraints.
Economists expect the Bank of Canada to maintain its key rate in the upcoming announcements amid ongoing uncertainties in the economic landscape. The next rate decision is scheduled for October 28, with policymakers closely monitoring developments to ensure financial stability and mitigate inflation risks.
