Bank of Canada’s Governor Tiff Macklem has highlighted an increasing risk of inflation, with surging energy costs and Canada’s retaliatory tariffs on U.S. goods as potential factors driving up prices for consumers and businesses. Macklem made these observations 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 held this rate steady for the seventh consecutive time since lowering it in October last year.
Speaking to reporters in Ottawa, Macklem expressed concerns about the impact of counter-tariffs and the ongoing U.S.-led conflict in the Middle East, which has led to a resurgence in oil prices. He emphasized that prolonged tensions in the region could spill over into the prices of various goods and services, posing a significant risk of inflation.
Despite acknowledging a “broadening recovery” in the economy, the bank stated that the war in the Middle East and U.S. tariffs have heightened the inflation risk. U.S. benchmark oil prices have surged approximately 13% since the last bank announcement in July, largely due to disruptions in tanker traffic through the critical Strait of Hormuz.
Moreover, the Canada-U.S. trade dispute has escalated, with President Donald Trump imposing substantial tariffs on Canadian products, reciprocated by Canada with equivalent tariffs on U.S. goods. To support affected workers and businesses, the Canadian government unveiled a $7.5 billion expanded economic relief program, supplementing the existing $25 billion in tariff support over the past year and a half.
Macklem expressed unease about Canada’s inflation rate climbing to three percent in July, primarily driven by elevated gasoline and oil prices influenced by the Middle East conflict. Market analysts, such as Derek Holt from Scotiabank, anticipate potential rate hikes totaling 75 basis points starting in the fourth quarter of 2026 based on forthcoming economic forecasts.
CIBC’s chief economist, Avery Shenfeld, noted uncertainties surrounding trade relations and predicted no immediate rate changes for the remainder of 2026 due to volatile oil and trade dynamics. While the Bank of Canada controls short-term borrowing costs, longer-term rates are dictated by the bond market, with recent increases in government bond yields signaling investor apprehensions.
Amidst these developments, the Bank of Canada remains vigilant, monitoring global bond yield trends and ensuring market stability. The benchmark 10-year Government of Canada bond yield surged to 3.80%, its highest level in over two years. In a recent Reuters poll, all 35 economists surveyed anticipated the bank to retain its key rate during the latest announcement, with the next rate decision scheduled for October 28.
