Bank of Canada’s Governor, Tiff Macklem, expressed concerns about the increasing inflation risk, highlighting higher energy costs and incoming tariffs on U.S. goods as potential drivers of rising prices for consumers and businesses in Canada. Macklem’s comments followed the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with market expectations. The bank had set this rate last October and has since maintained it unchanged for seven consecutive times.
Macklem emphasized that the escalating conflict in the Middle East and the subsequent rise in oil prices pose a significant risk of spilling over into the prices of other goods and services, potentially exacerbating inflation. The Bank of Canada acknowledged recent data indicating a broadening economic recovery but also noted that the ongoing war and U.S. tariffs heighten the inflation risk.
The U.S.-led conflict in Iran has led to a 13 per cent surge in U.S. benchmark oil prices since the bank’s previous announcement in July. Meanwhile, the Canada-U.S. trade war has intensified, with President Donald Trump imposing significant tariffs on Canadian products, prompting Canada to retaliate with equivalent tariffs on U.S. goods. The Canadian government has introduced a $7.5 billion expanded economic relief program to support affected workers and businesses in addition to the previous tariff relief measures.
Canada’s inflation rate rose to three per cent in July, primarily driven by increased gasoline and oil prices linked to the Middle East tensions. Macklem expressed concern over the higher-than-desired inflation rate, emphasizing the bank’s target of achieving two per cent inflation. Analysts anticipate potential rate hikes of 75 basis points starting in the fourth quarter of 2026.
Citing uncertainties surrounding trade relations, CIBC chief economist Avery Shenfeld stated that the bank’s decision to maintain the rate was expected amidst the ongoing trade war challenges. Shenfeld highlighted the uncertainties over trade as a significant factor affecting economic forecasts and rate decisions.
While the Bank of Canada influences short-term borrowing costs, longer-term rates are determined by the bond market. Macklem noted the impact of global bond yield movements on Canada, with the Canadian yield curve positioned below U.S. treasuries. Despite market volatility, Bank of Canada officials emphasized the importance of distinguishing between normal repricing of risk and potential instability.
The benchmark 10-year Government of Canada bond yield rose to 3.80 per cent on Wednesday, reaching its highest level in over two years. A recent Reuters poll of economists indicated a unanimous expectation for the bank to maintain its key rate during the latest announcement, with the next rate decision scheduled for October 28.