Bank of Canada Governor Tiff Macklem has raised concerns about the increasing risk of inflation, pointing to higher energy costs and the impact of Canadian tariffs on U.S. goods as key factors that could drive up prices for consumers and businesses. Macklem made these remarks following the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 percent, consistent with expectations from economists. The central bank has held this rate steady for the seventh consecutive time since lowering it in October last year.
Macklem highlighted the potential cost implications for businesses due to the counter-tariffs imposed by both Canada and the U.S., emphasizing that these tariffs could have a significant impact. However, he noted that the ongoing conflict in the Middle East poses a more significant threat to inflation, especially with the recent surge in oil prices.
The Bank of Canada affirmed its outlook for a broadening economic recovery but acknowledged the risks posed by the Middle East conflict and U.S. tariffs. Oil prices have surged by approximately 13 percent since the previous announcement in July, driven by escalating tensions in Iran, which have disrupted oil supply routes.
Meanwhile, the trade dispute between Canada and the U.S. has intensified, with both countries imposing significant tariffs on each other’s goods. The Canadian government has rolled out a $7.5 billion expanded economic relief program to support affected workers and businesses, in addition to the previous tariff support measures.
Inflation in Canada rose to three percent in July, primarily driven by increased gasoline prices influenced by the Middle East tensions. Macklem expressed concern over the current inflation rate exceeding the bank’s target of two percent, attributing it to the direct impact of the Iran conflict on oil prices.
Economists anticipate the Bank of Canada to maintain its key rate unchanged in the coming months amid uncertainties surrounding trade relations and global economic conditions. Market analysts predict a potential increase in interest rates starting in the fourth quarter of 2026, reflecting the evolving economic landscape.
Amidst the trade war uncertainties, longer-term interest rates are influenced by the bond market. While the Bank of Canada controls short-term borrowing costs, global market dynamics, including U.S. treasury yields, impact Canada’s bond market. The recent rise in bond yields and fluctuations in global markets have raised concerns over potential risks and instability, although officials emphasize that the current financial environment remains stable.
The Bank of Canada’s decision to keep the key rate unchanged was in line with expectations, with the next rate announcement scheduled for October 28. Market analysts and economists anticipate continued vigilance and flexibility in monetary policy to navigate the evolving economic landscape effectively.