Bank of Canada Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, highlighting rising energy costs and the impact of incoming tariffs on U.S. goods as potential drivers of price hikes for consumers and businesses in Canada. Macklem made these remarks following the decision by the central bank to maintain its benchmark interest rate at 2.25 per cent, a move that was in line with expectations from economists. This decision marked the seventh consecutive time the bank opted to keep its policy rate unchanged after lowering it to the current level last October.
During a media briefing in Ottawa, Macklem pointed out that the tariffs imposed by both Canada and the U.S. could lead to increased costs for certain businesses. However, he emphasized that the escalating conflict in the Middle East and the subsequent rise in oil prices pose a greater risk of spilling over into the prices of various goods and services.
The Bank of Canada stated that recent data supports its outlook for a broadening economic recovery but acknowledged that the ongoing war and trade tensions could heighten the threat of inflation. Notably, U.S. benchmark oil prices have surged approximately 13 per cent since the bank’s previous announcement in July, partly due to disruptions caused by the conflict in Iran.
In response to the escalating trade tensions between Canada and the U.S., President Donald Trump’s recent imposition of 50 per cent tariffs on Canadian products has led Canada to reciprocate with dollar-for-dollar tariffs on equivalent U.S. goods. The Canadian government has rolled out a $7.5 billion expanded economic relief program to assist affected workers and businesses, in addition to the significant tariff support provided over the past year and a half.
Macklem expressed concern over Canada’s inflation rate reaching three per cent in July, attributing the increase to the impact of the Middle East conflict on oil prices. He stressed the bank’s target of achieving two per cent inflation and highlighted the importance of upcoming economic forecasts in guiding future policy decisions.
Citing uncertainties surrounding trade relations and the impact of tariffs, economists like Derek Holt from Scotiabank and Avery Shenfeld from CIBC anticipate a cautious approach from the Bank of Canada in adjusting rates. While the bank remains watchful of developments in the energy and trade sectors, global bond market trends are also influencing borrowing costs in Canada, with longer-term rates reacting to shifts in U.S. treasury yields.
Despite the prevailing economic challenges, both Macklem and senior bank officials underscored the importance of monitoring market dynamics and ensuring stability amid evolving conditions. The bond market saw the benchmark 10-year Government of Canada bond yield rise to 3.80 per cent, the highest level in over two years. A recent Reuters poll of economists indicated unanimous expectations for the Bank of Canada to maintain its key rate during the latest announcement, with the next rate decision scheduled for October 28.
