Bank of Canada Governor Tiff Macklem has raised concerns about the increasing risk of inflation, pointing to higher energy costs and potential impacts from Canada’s new counter-tariffs on U.S. goods as key drivers of rising prices for consumers and businesses. Macklem’s comments came following the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, in line with economists’ expectations. This marks the seventh consecutive meeting where the bank has chosen to keep its policy rate unchanged since reducing it to the current level last October.
Macklem highlighted the potential cost implications for businesses due to the counter-tariffs and U.S. tariffs, emphasizing the concentrated nature of these levies. However, he identified the conflict in the Middle East as a more significant concern, noting that escalating tensions and oil price increases could lead to broader inflationary pressures.
The Bank of Canada acknowledged recent data supporting a broadening economic recovery but cautioned that ongoing conflicts and trade disputes, such as the U.S.-led actions in Iran, pose risks of higher inflation. Oil prices have surged approximately 13 per cent since the bank’s previous announcement in July, attributed to disruptions in the global oil supply chain.
In response to escalating trade tensions, Canada has implemented dollar-for-dollar tariffs on U.S. products, matching the levies imposed by the U.S. on Canadian goods. The government has introduced a $7.5-billion economic relief program to support affected workers and businesses, supplementing existing tariff relief measures.
Macklem expressed concerns over the current inflation rate, which rose to three per cent in July, primarily driven by increases in gasoline prices linked to geopolitical conflicts. Analysts anticipate the Bank of Canada’s upcoming economic forecasts in October to inform potential policy adjustments, with projections suggesting a series of rate hikes beginning in the fourth quarter of 2026.
Amid uncertainties surrounding trade relations, economists predict minimal rate changes in the near future, citing evolving oil and trade dynamics as key variables. The bond market has witnessed fluctuations, influenced by global trends and expectations of rate adjustments by central banks like the U.S. Federal Reserve. Despite increased bond yields, officials maintain vigilance against market volatility and liquidity risks.
The 10-year Government of Canada bond yield rose to 3.80 per cent, its highest level in over two years, reflecting market conditions. A recent Reuters poll indicated unanimous expectations for the Bank of Canada to maintain its key rate in the latest decision, with the next rate announcement scheduled for October 28.