Bank of Canada Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, citing rising energy costs and incoming dollar-for-dollar tariffs on U.S. goods as potential drivers of higher prices for consumers and businesses in Canada. Following the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, Macklem highlighted the impact of tariffs on businesses, particularly those in a narrow sector. He emphasized the escalating conflict in the Middle East as a significant factor affecting oil prices and, potentially, the prices of other goods and services.
The Bank of Canada confirmed a “broadening recovery” in the economy based on recent data but noted the risks posed by the ongoing war and U.S. tariffs on inflation. Oil prices surged approximately 13 per cent since the previous announcement in July, attributed to disruptions in tanker traffic due to the conflict in Iran. The trade tensions between Canada and the U.S. have intensified, with both countries imposing significant tariffs on each other’s products.
Canada’s inflation rate rose to three per cent in July, primarily driven by increased gas prices influenced by events in the Middle East. Macklem expressed concern over the higher-than-desired inflation rate and its concentration in gasoline and oil prices influenced by the situation in Iran. Analysts anticipate potential rate hikes by the Bank of Canada in the fourth quarter of 2026, given the evolving economic forecasts and market conditions.
Economists noted uncertainties over trade relations, with the current trade war casting a shadow of uncertainty over future economic developments. The bank acknowledged the potential drag on the economy from trade uncertainties despite assessing the direct impact of recent tariffs as relatively minor. The bond market has also seen fluctuations, with longer-term rates influenced by global factors, including expectations of rate adjustments by the U.S. Federal Reserve.
Bank of Canada officials emphasized the importance of monitoring market volatility and liquidity risks, highlighting the need to differentiate between normal price movements and potential instability. The benchmark 10-year Government of Canada bond yield reached a two-year high, reflecting the broader economic landscape. A recent poll of economists indicated expectations for the Bank of Canada to maintain its key rate, with the next rate announcement scheduled for October 28.
