Bank of Canada Governor Tiff Macklem has raised concerns about the increasing risk of inflation, citing higher energy costs and Canada’s newly imposed tariffs on U.S. goods as potential drivers of rising prices for consumers and businesses. Macklem’s comments followed the central bank’s decision to maintain its benchmark interest rate at 2.25 percent, in line with economists’ expectations. This marks the seventh consecutive meeting where the bank has kept the policy rate unchanged since lowering it in October last year.
Macklem highlighted the impact of tariffs on businesses, stating that while they could increase costs, they are applied to a limited range of products. However, he emphasized that the ongoing conflict in the Middle East is a more significant concern, particularly due to the recent surge in oil prices. The Bank of Canada noted that recent data supports its view of a broadening economic recovery but highlighted the potential inflationary risks posed by the Middle East conflict and U.S. tariffs.
The escalation of the trade war between Canada and the U.S. has further heightened economic uncertainties, with President Donald Trump imposing tariffs on Canadian products, reciprocated by Canada with equivalent tariffs on U.S. goods. To support affected workers and businesses, the Canadian government introduced a $7.5 billion economic relief program in addition to previous tariff support initiatives.
Canada’s inflation rate rose to three percent in July, exceeding the target rate of two percent set by the central bank. Macklem expressed concern over the high inflation rate, attributing it to the impact of the conflict in the Middle East on oil prices. Market analysts anticipate potential rate hikes later in 2026, with projections of a 75 basis points increase starting in the fourth quarter.
Amidst uncertainties over trade relations, CIBC chief economist Avery Shenfeld suggested that the recent tariff developments could impact future monetary policy decisions. While the Bank of Canada maintained its key rate in the latest meeting, long-term interest rates have been influenced by global bond market dynamics, with Canada’s yield curve remaining below U.S. treasuries. The central bank remains vigilant about potential risks in the financial system but has not observed signs of instability or dysfunction in current market conditions.
The Reuters poll of economists conducted in late August indicated unanimous expectations for the Bank of Canada to maintain its key rate at the recent meeting. The next rate announcement is scheduled for October 28.