Bank of Canada Governor Tiff Macklem has expressed concerns about the rising risk of inflation, pinpointing increased energy costs and Canada’s retaliatory tariffs on U.S. goods as key drivers of potential price hikes for consumers and businesses. Macklem’s comments followed the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 percent, in line with economists’ expectations. This decision marks the seventh consecutive meeting where the central bank has opted to keep its policy rate stable.
Macklem emphasized that the ongoing conflict in the Middle East poses a significant threat, stating, “The conflict has re-escalated. Oil prices are back up. The longer this persists, the greater the risk of spillover effects on the prices of other goods and services.” The central bank acknowledged recent data indicating a broadening economic recovery but also highlighted the potential inflationary impact stemming from the war and U.S. tariffs.
Amidst escalating trade tensions, the U.S.-Canada trade war intensified with President Donald Trump imposing significant tariffs on Canadian products, prompting Canada to reciprocate with equivalent tariffs on U.S. goods. In response to the economic fallout, the Canadian government unveiled a $7.5-billion expanded relief program for affected workers and businesses, supplementing the previous $25 billion in tariff support measures.
Canada’s inflation rate surged to three percent in July, driven by Middle East conflicts impacting gas prices, a development Macklem deemed “too high” given the bank’s two percent inflation target. Analysts like Derek Holt from Scotiabank anticipate potential rate hikes totaling 75 basis points starting in the fourth quarter of 2026, pending the bank’s forthcoming economic forecasts in October.
CIBC chief economist Avery Shenfeld noted that the Bank of Canada’s decision to maintain rates was expected given the uncertainties surrounding the ongoing trade war. Shenfeld highlighted the bank’s caution regarding trade-related uncertainties and the potential impact on economic projections, emphasizing the need for clarity on trade policies to guide future monetary policy decisions.
While the Bank of Canada exerts control over short-term borrowing costs, long-term rates are influenced by the bond market. With U.S. treasury yields rising to multi-year highs, global bond yield fluctuations are impacting Canada’s market. Bank officials underscored the importance of monitoring market stability amid shifting global economic conditions. The benchmark 10-year Government of Canada bond yield surged to 3.80 percent, its highest level in over two years. Economists widely anticipate the Bank of Canada to maintain its key rate in the upcoming October announcement.
