Bank of Canada Governor Tiff Macklem has highlighted the increasing risk of inflation, with surging energy costs overshadowing Canada’s latest dollar-for-dollar tariffs on U.S. goods as a significant factor that could drive up prices for consumers and businesses.
Macklem’s comments came after the central bank of Canada maintained its benchmark interest rate at 2.25 per cent, in line with economists’ expectations. The bank had reduced its policy rate to the current level in October of the previous year. This recent decision marks the seventh consecutive time the bank has opted to keep its policy rate unchanged.
Speaking to reporters in Ottawa, Macklem pointed out that the tariffs imposed by both Canada and the U.S. could increase costs for certain businesses. He noted that while these tariffs are steep, they apply to a relatively limited range of products.
However, Macklem emphasized that the primary concern is the ongoing conflict in the Middle East. He expressed that the resurgence of the conflict has led to a rise in oil prices, posing a significant risk of spillover effects on the prices of other goods and services.
The bank’s decision reflected recent data confirming expectations for a broader economic recovery. Nevertheless, policymakers cautioned that the conflict in the Middle East and the U.S. tariffs heighten the potential for increased inflation.
Oil prices in the U.S. have surged by approximately 13 per cent since the bank’s previous announcement in July. The escalating war in Iran, led by the U.S., has disrupted tanker traffic through the vital Strait of Hormuz, a crucial route for global oil transportation.
Simultaneously, the trade tensions between Canada and the U.S. have intensified since the bank’s last meeting in July. President Donald Trump recently imposed 50 per cent tariffs on around $28 billion worth of Canadian goods, prompting Canada to reciprocate with equivalent tariffs on $27.6 billion of U.S. products.
To mitigate the impact on affected workers and businesses, the Canadian government unveiled a $7.5 billion expanded economic relief program last week. This additional support supplements the nearly $25 billion in tariff assistance provided over the past 18 months.
Macklem expressed concern over the country’s inflation rate, which rose to three per cent in July. He emphasized the bank’s objective of achieving a two per cent inflation rate, highlighting the concentrated impact on gasoline and oil prices due to the conflict in Iran.
Looking ahead, Derek Holt, vice president and head of capital markets economics at Scotiabank, anticipates a series of rate hikes totaling 75 basis points starting in the fourth quarter of 2026. Despite the uncertainties surrounding trade relations, CIBC chief economist Avery Shenfeld believes that a rate change is unlikely in the coming year. Shenfeld emphasized the potential shifts in the oil and trade war scenarios in the months ahead.
While the Bank of Canada influences short-term borrowing costs, longer-term rates are determined by the bond market. Macklem noted the spillover effect of rising global bond yields into Canada, with the country’s yield curve positioned below U.S. treasuries.
Senior Deputy Governor Carolyn Rogers highlighted the importance of distinguishing between volatility and instability in bond markets. She emphasized the risks associated with leveraged investors unwinding positions rapidly, leading to liquidity concerns. As bond yields remain elevated, experts suggest that policymakers are likely to maintain the current key rate in the upcoming rate announcement scheduled for October 28.