Bank of Canada Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, highlighting rising energy costs and incoming tariffs on U.S. goods as potential drivers of higher prices for consumers and businesses in Canada. Macklem’s comments followed the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with expectations from economists. The central bank last adjusted its policy rate in October last year and has now kept it unchanged for the seventh consecutive time.
Macklem emphasized that the recent tariffs, particularly those imposed by the U.S., could lead to increased costs for certain businesses due to their significant impact. However, he pointed out that the ongoing conflict in the Middle East poses a more significant threat to inflation, especially as oil prices have surged amidst the escalating tensions.
The Bank of Canada noted that recent economic data supports its outlook for a broadening recovery in the economy. Yet, policymakers highlighted the risks of higher inflation stemming from the Middle East conflict and trade tensions with the U.S. Oil prices in the U.S. have risen by approximately 13 per cent since the bank’s previous announcement in July, partly driven by disruptions in the Strait of Hormuz due to the conflict in Iran.
Furthermore, the trade dispute between Canada and the U.S. has intensified, with President Donald Trump imposing tariffs on Canadian products, reciprocated by Canada with counter-tariffs on U.S. goods. To support affected workers and businesses, the Canadian government unveiled a $7.5-billion expanded economic relief program in addition to prior tariff support measures.
Macklem expressed concern over the inflation rate, which reached three per cent in July, primarily driven by heightened oil prices linked to the Middle East tensions. Analysts anticipate the Bank of Canada to closely monitor economic indicators for potential rate adjustments, with expectations of rate hikes beginning in the fourth quarter of 2026.
Amid uncertainties surrounding trade relations and global economic conditions, the Bank of Canada opted to maintain its current interest rate. Experts suggest that the bank’s stance reflects the unpredictable nature of trade conflicts and their impact on the economy. Looking ahead, the oil market dynamics and ongoing trade disputes could influence future monetary policy decisions.
While short-term borrowing costs are controlled by the central bank, longer-term rates are dictated by the bond market. Recent increases in U.S. treasury yields have influenced Canadian bond yields, prompting discussions about market volatility and risk factors. Despite the rise in the 10-year Government of Canada bond yield to 3.80 per cent, experts anticipate the Bank of Canada to keep its key rate unchanged until its next announcement in October.