Bank of Canada Governor Tiff Macklem has highlighted the increasing risk of inflation, pointing to rising energy costs and Canada’s new tariffs on U.S. goods as potential drivers of higher prices for consumers and businesses.
Macklem’s comments followed the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 per cent, aligning with expectations from economists. The central bank had previously lowered the rate in October last year and has now kept it unchanged for the seventh consecutive time.
Regarding the impact of tariffs, Macklem noted that the additional costs imposed on businesses could lead to inflation. He emphasized that the ongoing conflict in the Middle East, which has caused a surge in oil prices, poses a significant risk of spilling over into other goods and services.
Despite acknowledging a strengthening economic recovery, the central bank expressed concerns about the potential inflationary effects of the Middle East conflict and U.S. tariffs. Oil prices have surged following recent developments in the region, affecting global markets due to disruptions in tanker traffic through vital passageways.
The article also mentioned the escalating Canada-U.S. trade war, with President Donald Trump imposing tariffs on Canadian products, reciprocated by Canada with equivalent tariffs on U.S. goods. The Canadian government introduced a $7.5-billion economic relief program to support affected workers and businesses, in addition to existing tariff relief measures.
Inflation in Canada reached three per cent in July, primarily driven by increased gasoline prices linked to developments in the Middle East. Macklem expressed concern about the high inflation rate, emphasizing the bank’s target of achieving two per cent inflation.
Economists, including Derek Holt from Scotiabank, anticipate potential rate hikes starting in the fourth quarter of 2026 based on the bank’s upcoming economic forecasts. Uncertainties surrounding trade relations, coupled with the impact of oil prices and trade conflicts, could influence future monetary policy decisions.
Amidst trade uncertainties and market dynamics, the Bank of Canada is closely monitoring longer-term interest rates influenced by the bond market. While global bond yields have seen fluctuations, the bank remains vigilant about potential risks associated with rapid changes in investor behavior and market liquidity.
The benchmark 10-year Government of Canada bond yield rose to 3.80 per cent, reaching a two-year high. Economists polled expected the Bank of Canada to maintain its key rate in the latest announcement, with the next rate decision scheduled for October 28.
