Bank of Canada Governor Tiff Macklem has highlighted the growing threat of inflation, pointing to increased energy costs and Canada’s new counter-tariffs on U.S. goods as potential drivers of rising prices for consumers and businesses. Macklem made these comments following the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, a move that was widely anticipated by economists. The bank has kept this rate unchanged for the seventh consecutive time.
Macklem expressed concerns about the impact of tariffs on businesses, stating that while they may lead to increased costs for some sectors, the broader issue lies in the ongoing conflict in the Middle East. He emphasized that the resurgence of the conflict has pushed up oil prices, posing a risk of spillover effects on the prices of other goods and services.
Despite reaffirming its forecast for a strengthening economic recovery, the bank acknowledged the risks posed by the Middle East conflict and U.S. tariffs, which could contribute to higher inflation. Oil prices have surged by approximately 13 per cent since the bank’s previous announcement, driven in part by disruptions in oil supply due to the conflict in Iran.
The Canada-U.S. trade dispute has escalated further, with Canada imposing dollar-for-dollar tariffs on $27.6 billion of U.S. goods in response to U.S. tariffs on Canadian products. The Canadian government has introduced a $7.5 billion economic relief program to support affected workers and businesses, adding to the significant tariff relief measures implemented over the past year and a half.
Macklem expressed concern over the recent spike in inflation, attributing it to the conflict in the Middle East and its impact on oil prices. He stressed the bank’s goal of achieving two per cent inflation and highlighted the need for ongoing monitoring and analysis of economic data.
Economists, including Derek Holt from Scotiabank, anticipate potential rate hikes totaling 75 basis points starting in the fourth quarter of 2026, pending the bank’s economic forecasts in October. Meanwhile, uncertainties surrounding trade relations, particularly amid the trade war and tariff escalations, continue to cloud the economic outlook.
While the Bank of Canada maintains control over short-term interest rates, longer-term rates are influenced by the bond market. Macklem noted the impact of global bond yield movements on Canada and emphasized the need to differentiate between market volatility and instability. The benchmark 10-year Government of Canada bond yield rose to 3.80 per cent, its highest level in over two years, reflecting changing market dynamics.
A recent survey of economists predicted that the Bank of Canada would keep its key rate unchanged in the latest decision. The next rate announcement is scheduled for October 28.