Bank of Canada Governor Tiff Macklem has highlighted the growing risk of inflation, pointing to heightened energy costs and incoming tariffs on U.S. goods as potential factors driving up prices for consumers and businesses in Canada. Macklem’s comments came following the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, aligning with expectations from economists. This marks the seventh consecutive meeting where the bank has opted to keep its policy rate unchanged since lowering it in October last year.
Macklem emphasized that the ongoing conflict in the Middle East poses a significant concern, particularly as it has led to a resurgence in oil prices. The prolonged duration of the conflict increases the likelihood of price increases extending to other goods and services beyond energy products.
While recent economic data indicates a broadening recovery in the Canadian economy, the central bank acknowledged the heightened risks of inflation due to the Middle East conflict and U.S. tariffs. Oil prices surged approximately 13 per cent since the previous bank announcement in July, attributed to disruptions caused by the escalating U.S.-led conflict in Iran.
Furthermore, tensions in Canada-U.S. trade relations have escalated, with President Donald Trump imposing tariffs on Canadian products, reciprocated by Canada with equivalent levies on U.S. goods. To support affected workers and businesses, the Canadian government unveiled a $7.5-billion economic relief program, supplementing the existing tariff support initiatives.
Macklem expressed concern over the rising inflation rate, which reached three per cent in July, primarily driven by increased gasoline prices linked to the Middle East conflict. The Governor underscored the bank’s objective of achieving two per cent inflation.
Economists anticipate the Bank of Canada to remain cautious and await further economic forecasts in October before considering any policy adjustments. Speculations suggest a potential increase of 75 basis points in interest rates starting in the fourth quarter of 2026.
Amidst uncertainties stemming from trade conflicts, experts like CIBC chief economist Avery Shenfeld foresee minimal chances of rate adjustments in the near term. The bank’s decision to hold rates steady reflects the prevailing trade tensions and their impact on economic outlook.
While the Bank of Canada can influence short-term borrowing costs, the bond market determines long-term rates. Noting the rise in U.S. treasury yields, Macklem highlighted the spillover effect on Canadian bond yields. The recent increase in the 10-year Government of Canada bond yield to 3.80 per cent signifies heightened market activity and investor sentiments.
Market analysts and a Reuters poll of economists anticipate the Bank of Canada to maintain its current key rate in the upcoming October 28 announcement. The central bank continues to monitor economic developments closely amid evolving global uncertainties.