Bank of Canada Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, particularly highlighting the rising energy costs and the potential impact of tariffs on U.S. goods. The central bank recently announced its decision to maintain the benchmark interest rate at 2.25 percent, consistent with market expectations. Macklem emphasized that ongoing conflicts in the Middle East and the consequent surge in oil prices pose a significant threat to triggering broader inflationary pressures across various sectors.
The Bank of Canada acknowledged the positive signs of a “broadening recovery” in the economy based on recent data. However, policymakers cautioned that the Middle East conflict and the imposition of U.S. tariffs could elevate the risk of inflation. Notably, U.S. oil prices have surged by approximately 13 percent since the last central bank announcement in July, driven by the heightened tensions in Iran affecting global oil supply routes.
Simultaneously, the trade tensions between Canada and the U.S. have escalated, with both countries imposing significant tariffs on each other’s goods. President Donald Trump initiated a 50 percent tariff on Canadian products, prompting Canada to reciprocate with dollar-for-dollar tariffs on U.S. goods. To support affected businesses and workers, the Canadian government unveiled a $7.5 billion expanded economic relief program in addition to the existing tariff support measures.
Macklem expressed unease over the inflation rate, which soared to three percent in July, primarily attributed to the turmoil in the Middle East impacting gasoline and oil prices. The central bank’s focus remains on achieving a two percent inflation target. Analysts anticipate the bank’s upcoming economic forecasts in October to guide potential rate adjustments. Derek Holt from Scotiabank foresees a series of rate hikes totaling 75 basis points starting in the fourth quarter of 2026.
Given the uncertainties surrounding trade relations and the evolving economic landscape, CIBC chief economist Avery Shenfeld believes that the current circumstances do not warrant a definitive rate change prediction for 2026. The bond market dynamics, influenced by global trends and expectations of rate adjustments by the U.S. Federal Reserve, are also contributing to the evolving economic environment in Canada. The central bank remains vigilant about potential risks in the market but reassures that current stability is not compromised.
The benchmark 10-year Government of Canada bond yield recently surged to 3.80 percent, marking a significant increase over the past two years. A recent Reuters poll revealed unanimous expectations among 35 economists that the Bank of Canada would maintain its key rate during the latest announcement, with the next rate decision scheduled for October 28.