Bank of Canada’s Governor, Tiff Macklem, expressed concerns about the increasing risk of inflation, highlighting that rising energy costs could potentially drive up prices for both consumers and businesses in Canada more than the incoming dollar-for-dollar tariffs on U.S. goods. Macklem’s comments followed the decision by Canada’s central bank to maintain its benchmark interest rate at 2.25 per cent, a move widely anticipated by economists. The bank had initially lowered the rate to its current level in October of the previous year and has now kept it unchanged for the seventh consecutive time.
Macklem pointed out that the tariffs imposed by the U.S. and the counter-tariffs from Canada would raise costs for certain businesses, albeit on a limited scale due to their targeted nature. However, he emphasized that the ongoing conflict in the Middle East, which has led to a resurgence in oil prices, poses a more significant threat. The prolonged conflict could potentially escalate and impact the prices of various goods and services beyond just energy products.
The Bank of Canada acknowledged recent data indicating a broadening economic recovery but also highlighted the risks posed by the Middle East conflict and U.S. tariffs in terms of driving inflation higher. U.S. benchmark oil prices have surged approximately 13 per cent since the previous bank announcement in July, partly due to the escalating tensions in Iran affecting global oil supply routes.
Simultaneously, the trade tensions between Canada and the U.S. have intensified, with President Donald Trump imposing significant tariffs on Canadian products, prompting Canada to reciprocate with corresponding tariffs on U.S. goods. The Canadian government has rolled out a $7.5 billion expanded economic relief program to support affected workers and businesses, supplementing the tariff-related support measures implemented over the past year and a half.
Macklem expressed concern over the high inflation rate in Canada, which reached three per cent in July, primarily driven by increased gasoline and oil prices influenced by the Middle East conflict. Analysts anticipate the Bank of Canada to scrutinize the upcoming economic forecasts in October, with expectations of potential rate hikes starting in the last quarter of 2026.
Amidst uncertainties surrounding trade relations, economists foresee minimal rate adjustments by the Bank of Canada for the remainder of the year, considering the evolving situations in the oil market and trade disputes. The bond market is also experiencing fluctuations, with longer-term rates being influenced by global factors, including expectations of rate adjustments by the U.S. Federal Reserve. Despite the rise in Canadian bond yields, officials emphasize the importance of monitoring market volatility to mitigate risks of instability due to abrupt investor actions.
A recent Reuters poll indicated unanimous expectations among economists for the Bank of Canada to maintain its key rate during the latest announcement. The next rate decision by the Bank of Canada is scheduled for October 28.