Bank of Canada Governor Tiff Macklem has expressed concerns over the increasing risk of inflation, citing rising energy costs and the impact of tariffs on U.S. goods as potential drivers of higher prices for consumers and businesses in Canada. Macklem’s comments followed the decision by Canada’s central bank to maintain its benchmark interest rate at 2.25 per cent, in line with economists’ expectations. The bank had reduced the rate to its current level in October last year, and this marks the seventh consecutive time the rate has remained unchanged.
Addressing reporters in Ottawa, Macklem highlighted the additional costs that businesses may face due to counter-tariffs imposed by the U.S. He emphasized that the ongoing conflict in the Middle East, coupled with the surge in oil prices, poses a significant risk of spillover effects on the prices of various goods and services.
The Bank of Canada acknowledged recent data indicating a strengthening economic recovery but cautioned that the conflict in the Middle East and U.S. tariffs could elevate the risk of inflation. Oil prices have risen by approximately 13 per cent since the bank’s previous announcement in July, attributed to the escalating U.S.-led war in Iran affecting tanker traffic through critical oil supply routes.
Furthermore, the Canada-U.S. trade dispute has intensified, with President Donald Trump imposing substantial tariffs on Canadian products, reciprocated by Canada with comparable tariffs on U.S. goods. The Canadian government has introduced a $7.5 billion economic relief program for affected workers and businesses, supplementing existing tariff support initiatives.
Macklem expressed concern over the inflation rate, which surged to three per cent in July, primarily driven by increased gasoline and oil prices influenced by the Iran conflict. Analysts anticipate the Bank of Canada to assess economic forecasts in October, with the possibility of rate hikes in the fourth quarter of 2026.
Amidst trade uncertainties, CIBC chief economist Avery Shenfeld emphasized the impact of trade tensions on economic outlook, suggesting minimal rate changes for the remainder of 2026. The bond market has witnessed a rise in yields, influenced by global factors and expectations of rate adjustments by central banks.
The Bank of Canada continues to monitor market developments closely, distinguishing between normal market fluctuations and potential risks of instability. While short-term borrowing costs remain within the bank’s control, longer-term rates are influenced by market dynamics. The benchmark 10-year Government of Canada bond yield saw an increase to 3.80 per cent, reaching its highest level in over two years. Economists in a recent poll unanimously predicted the bank to maintain its key rate, with the next rate announcement scheduled for October 28.