Bank of Canada Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, citing elevated energy costs and the impact of dollar-for-dollar tariffs on U.S. goods as potential drivers of rising prices for consumers and businesses in Canada.
Following the central bank’s decision to maintain the benchmark interest rate at 2.25 per cent, Macklem highlighted the potential cost implications of counter-tariffs on businesses. He emphasized that the ongoing conflict in the Middle East, which has led to a surge in oil prices, poses a significant risk of spillover effects on the prices of other goods and services.
Despite acknowledging recent data supporting a broadening economic recovery, policymakers also noted the heightened inflation risk due to the war in the Middle East and U.S. tariffs. U.S. benchmark oil prices have risen approximately 13 per cent since the previous bank announcement, driven by the escalating tensions in Iran affecting global oil markets.
Moreover, the trade tensions between Canada and the U.S. have intensified, with reciprocal tariffs imposed on billions of dollars’ worth of goods. In response to these challenges, the Canadian government has implemented a $7.5-billion economic relief program to support affected workers and businesses, supplementing the existing tariff support initiatives.
Macklem expressed concern over the inflation rate reaching three per cent in July, primarily driven by increased gasoline and oil prices influenced by the Middle East conflict. The central bank is closely monitoring economic forecasts, with expectations of potential rate hikes in the fourth quarter of 2026.
Citing uncertainties over trade relations amid the ongoing trade war, economists like Avery Shenfeld anticipate minimal rate changes for the rest of the year. The bond market has witnessed increased volatility, with longer-term rates reflecting global trends and expectations of adjustments by the U.S. Federal Reserve.
While Canada’s yield curve remains below U.S. treasuries, officials are cautious about potential risks associated with rapid unwinding of leveraged positions and liquidity constraints in the financial markets. The benchmark 10-year Government of Canada bond yield surged to 3.80 per cent, marking a two-year high.
In light of these developments, economists predict the Bank of Canada to maintain its key rate in the upcoming announcements, scheduled for October 28.