Bank of Canada Governor Tiff Macklem has highlighted a growing inflation risk, attributing it to escalating energy prices and Canada’s implementation of counter-tariffs on U.S. goods. Macklem’s comments followed the Bank of Canada’s decision to maintain its key interest rate at 2.25%, aligning with economists’ expectations. This marks the seventh consecutive meeting where the central bank has opted to keep its policy rate unchanged since lowering it in October last year.
Macklem emphasized the potential impact of the trade war and Middle East conflict on inflation. He mentioned that the ongoing conflict in the Middle East has led to a resurgence in oil prices, which could extend the inflationary pressure beyond energy-related sectors.
While confirming a broadening economic recovery, the bank acknowledged the risks posed by the trade war and Middle East tensions on inflation. U.S. benchmark oil prices have surged following recent geopolitical developments, including disruptions in oil supply routes due to the conflict.
In response to the escalating trade tensions, Canada imposed dollar-for-dollar tariffs on a significant portion of U.S. goods, mirroring U.S. tariffs on Canadian products. The government introduced a $7.5 billion economic relief program to support affected businesses and workers, adding to the substantial tariff relief already provided over the past year and a half.
Canada’s inflation rate rose to three percent in July, primarily driven by increased gasoline and oil prices linked to global geopolitical events. Macklem expressed concern over the elevated inflation rate, emphasizing the bank’s target of achieving two percent inflation. Market analysts anticipate potential rate hikes of up to 75 basis points starting in the fourth quarter of 2026, pending economic developments.
The bank’s decision to maintain the interest rate amid heightened trade uncertainties was deemed unsurprising by CIBC chief economist Avery Shenfeld. He highlighted the challenges posed by trade tensions and uncertainties, suggesting that the bank’s stance reflects the evolving economic landscape.
While the Bank of Canada influences short-term borrowing costs, longer-term rates are dictated by the bond market. The recent surge in U.S. treasury yields has had a ripple effect on global markets, prompting investors to reassess risk and demand higher returns. Despite fluctuations in bond yields, bank officials remain vigilant about potential market vulnerabilities and the need to monitor investor behavior.
The 10-year Government of Canada bond yield rose to 3.80%, reaching its highest level in over two years. A recent poll of economists predicted the bank would maintain its current rate, with the next rate announcement scheduled for October 28.
