Bank of Canada’s Governor Tiff Macklem has highlighted an increasing risk of inflation, citing rising energy costs as a major factor alongside Canada’s retaliatory tariffs on U.S. goods. Macklem’s comments followed the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with analyst expectations. The central bank has held this rate steady since lowering it in October of the previous year, marking the seventh consecutive meeting without a change.
Macklem expressed concerns about the impact of tariffs on businesses, particularly amid the ongoing conflict in the Middle East, which has resulted in a resurgence of oil prices. This escalation in oil prices poses a potential threat of spillover effects on the prices of various goods and services, according to Macklem.
While recent economic data supports the bank’s outlook for a broadening economic recovery, policymakers acknowledge the heightened risk of inflation due to the Middle East conflict and U.S. tariffs. Notably, U.S. benchmark oil prices have surged approximately 13% since the bank’s previous announcement in July, driven by geopolitical tensions in Iran impacting global oil supply routes.
The Canada-U.S. trade dispute has also intensified, with President Trump imposing significant tariffs on Canadian products, reciprocated by Canada with equivalent tariffs on U.S. goods. In response to these trade tensions, the Canadian government has rolled out a $7.5 billion expanded economic relief program for affected workers and businesses, supplementing previous tariff support initiatives.
Macklem emphasized that Canada’s inflation rate, reaching three per cent in July, is higher than the bank’s target of two per cent, largely attributed to increased gasoline and oil prices influenced by the Iran conflict. Analysts anticipate potential rate hikes starting in the fourth quarter of the year, contingent on economic forecasts due in October.
Despite uncertainties surrounding trade relations and geopolitical tensions, the Bank of Canada opted to maintain its current interest rate, reflecting the complexities of the current economic landscape. Meanwhile, global bond market dynamics, particularly in the U.S., are influencing longer-term interest rates, with Canada’s yield curve positioned below U.S. treasuries. Bank officials underscore the importance of monitoring market volatility and risk repricing to ensure financial stability.
The benchmark 10-year Government of Canada bond yield surged to 3.80 per cent, its highest level in over two years, signaling market movements amid economic uncertainties. Economists expect the Bank of Canada to retain its key rate in the upcoming October announcement, aligning with market consensus and the evolving economic landscape.
