Bank of Canada’s Governor Tiff Macklem has expressed concerns about the increasing inflation risk, highlighting that elevated energy costs and Canada’s newly imposed tariffs on U.S. goods could drive up prices for consumers and businesses. Macklem made these statements following the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 percent, aligning with economists’ expectations. The central bank has held this rate steady since October last year, marking the seventh consecutive meeting without a change.
Macklem emphasized the impact of tariffs on businesses, particularly the recent counter-tariffs and the broader implications of the U.S.-led war in the Middle East. He noted that the ongoing conflict has led to a re-escalation, causing oil prices to surge. The central bank acknowledged recent data indicating a strengthening economic recovery but also highlighted the heightened inflation risks due to the war and trade tensions.
Furthermore, the trade dispute between Canada and the U.S. has intensified, with President Donald Trump imposing significant tariffs on Canadian products, reciprocated by Canada with dollar-for-dollar tariffs on U.S. goods. To support affected workers and businesses, the government introduced a $7.5 billion expanded economic relief program in addition to the previously implemented tariff support.
Macklem expressed concern over the inflation rate, which rose to three percent in July, attributing it to the conflict in the Middle East affecting oil prices. Analysts like Derek Holt from Scotiabank anticipate potential rate hikes in the fourth quarter of 2026 following the central bank’s forthcoming economic forecasts in October.
Uncertainties surrounding trade relations were highlighted by CIBC’s chief economist Avery Shenfeld, who emphasized the impact of the trade war on economic outlook. Shenfeld suggested that the bank’s decision to maintain rates was influenced by the ongoing trade uncertainties and the potential ramifications of existing tariffs.
In the bond market, longer-term rates are affected by global trends, with Canadian yields reacting to movements in the U.S. treasury market. Notably, Bank of Canada officials emphasized the importance of distinguishing between price volatility and market instability. Despite rising bond yields, there are currently no signs of significant market disruptions.
Looking ahead, market analysts anticipate the Bank of Canada to maintain its key rate at the next meeting scheduled for October 28, with global economic conditions and trade dynamics continuing to influence monetary policy decisions.