Bank of Canada Governor Tiff Macklem has highlighted increasing inflation risks, pointing to rising energy costs and incoming tariffs on U.S. goods as potential drivers of price hikes for consumers and businesses in Canada. Macklem made these comments following the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with economists’ expectations. The bank has kept its policy rate unchanged for the seventh consecutive time.
Macklem emphasized that the ongoing conflict in the Middle East is a significant concern, especially with the recent spike in oil prices. The central bank stated that recent data supports its outlook for a broadening economic recovery, but it also acknowledged that the war and U.S. tariffs could lead to higher inflation.
The trade tensions between Canada and the U.S. have escalated, with both countries imposing significant tariffs on each other’s goods. The Canadian government has introduced a $7.5-billion economic relief program to assist affected workers and businesses, in addition to the previous tariff support measures.
Canada’s inflation rate rose to three per cent in July, primarily driven by higher gasoline prices due to the Middle East conflict. Macklem expressed concern over the elevated inflation rate, emphasizing the bank’s target of achieving two per cent inflation. Analysts anticipate potential rate hikes in the fourth quarter of 2026 based on the bank’s upcoming economic forecasts.
The central bank’s decision to maintain the interest rate was not unexpected, given the uncertainties surrounding the trade war. Despite noting that the direct impact of the latest tariffs may be limited, the bank highlighted trade uncertainties as a significant challenge. The bond market has also seen increased volatility, with longer-term rates influenced by global trends and expectations of rate adjustments by the U.S. Federal Reserve.
While Canada’s short-term borrowing costs are under the bank’s control, longer-term rates are influenced by market dynamics. The 10-year Government of Canada bond yield rose to 3.80 per cent, its highest level in over two years. Economists predict that the bank will keep its key rate unchanged in the next announcement scheduled for Oct. 28.