Bank of Canada Governor Tiff Macklem has highlighted the growing inflation risk, attributing it to increased energy costs and Canada’s new counter-tariffs on U.S. goods. Macklem made these comments 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. This marks the seventh consecutive time the bank has kept its policy rate unchanged since lowering it in October last year.
Macklem expressed concerns about the impact of tariffs on businesses, particularly the recent tariffs imposed by the U.S. and Canada. He emphasized that the ongoing conflict in the Middle East and the resulting rise in oil prices pose a significant risk of spilling over into the prices of other goods and services, further heightening inflationary pressures.
The Bank of Canada acknowledged recent data indicating a broadening economic recovery but noted that the geopolitical tensions and trade tariffs could lead to higher inflation. U.S. benchmark oil prices have surged by approximately 13 per cent since the bank’s last announcement in July, partly due to the escalating conflict in Iran disrupting oil supply routes.
In response to the escalating trade tensions between Canada and the U.S., the federal government announced dollar-for-dollar tariffs on U.S. goods, matching the tariffs imposed by the U.S. on Canadian products. The government also introduced a $7.5 billion expanded economic relief program to support affected workers and businesses, supplementing the existing tariff relief measures.
Macklem expressed concern over the rise in Canada’s inflation rate to three per cent in July, primarily driven by escalating tensions in the Middle East affecting oil prices. The central bank aims to maintain a two per cent inflation target and is closely monitoring economic indicators to assess the need for potential rate adjustments.
Market analysts anticipate increased volatility in the bond market, with investors closely watching global bond yields. While Canada’s central bank controls short-term borrowing costs, longer-term rates are influenced by market dynamics. Bank officials emphasized the importance of distinguishing between market volatility and instability, highlighting the risks associated with rapid unwinding of leveraged positions and liquidity constraints.
The benchmark 10-year Government of Canada bond yield rose above basis points to 3.80 per cent, reaching its highest level in over two years. Despite uncertainties surrounding trade relations and geopolitical tensions, economists expect the Bank of Canada to maintain its current key rate in the upcoming rate announcement scheduled for October 28.