Bank of Canada Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, highlighting rising energy costs and incoming dollar-for-dollar tariffs on U.S. goods as potential drivers of higher prices for consumers and businesses in Canada.
Following the central bank’s decision to maintain the benchmark interest rate at 2.25 per cent, Macklem emphasized the impact of tariffs on businesses, particularly in light of the ongoing conflict in the Middle East. He warned that prolonged conflicts could lead to higher prices for various goods and services.
While acknowledging a “broadening recovery” in the economy, the bank noted that recent data supports its projections. However, policymakers also raised concerns about the potential for inflation due to the war in the Middle East and U.S. tariffs.
The escalation of the Canada-U.S. trade war has further complicated the economic landscape. President Donald Trump’s imposition of significant tariffs on Canadian products prompted Canada to retaliate with corresponding tariffs on U.S. goods. In response, the federal government announced a $7.5 billion economic relief program to support affected workers and businesses.
Macklem criticized the current inflation rate of three per cent in July as being “too high,” attributing it to the conflict in Iran affecting oil prices. Analysts, such as Derek Holt from Scotiabank, anticipate rate hikes starting in the fourth quarter of 2026, citing upcoming economic forecasts as critical for the Bank of Canada’s decisions.
Economists, including CIBC’s Avery Shenfeld, highlighted uncertainties over trade relations and the impact of tariffs on the economic outlook. The bond market has also seen fluctuations, with longer-term rates influenced by global trends and market expectations.
Despite the challenges, Bank of Canada officials emphasized the importance of stability and monitoring market dynamics to mitigate risks. The central bank’s focus remains on managing inflation and supporting economic recovery amidst evolving global dynamics.