Bank of Canada Governor Tiff Macklem has highlighted the increasing risk of inflation, pointing to the surge in energy costs and the impact of dollar-for-dollar tariffs on U.S. goods as potential drivers of rising prices for consumers and businesses in Canada.
Macklem’s comments followed the decision by Canada’s central bank to maintain its benchmark interest rate at 2.25 per cent, a move in line with economists’ expectations. The central bank had lowered the rate to its current level in October of the previous year, marking the seventh consecutive time it has kept the policy rate unchanged.
“The counter-tariffs, and indeed the U.S. tariffs … will add costs for some businesses,” Macklem stated during a media briefing in Ottawa. He emphasized that while these tariffs are significant, they apply to a relatively limited range of products.
Macklem highlighted the escalating conflict in the Middle East as a major concern, stating, “The conflict has re-escalated. Oil prices are back up. The longer this situation persists, the greater the risk of it impacting prices of other goods and services.”
The central bank’s decision noted that recent data supports its forecast of a broadening economic recovery. However, policymakers also acknowledged that the ongoing war and U.S. tariffs pose a risk of driving inflation higher.
Meanwhile, U.S. benchmark oil prices have surged approximately 13 per cent since the bank’s previous announcement in July. The U.S.-led conflict in Iran has intensified recently, leading to disruptions in tanker traffic through the critical Strait of Hormuz, a key route for oil transportation to global markets.
In response to the escalating Canada-U.S. trade tensions, Canada has implemented dollar-for-dollar tariffs on $27.6 billion of comparable U.S. goods, matching the 50 per cent tariffs imposed by the U.S. on about $28 billion worth of Canadian products. The Canadian government has also introduced a $7.5 billion expanded economic relief program for affected workers and businesses in addition to the previous $25 billion in tariff support over the past 18 months.
Addressing the rise in inflation to three per cent in July, Macklem expressed concern, stating, “That’s too high,” and emphasized the bank’s goal of achieving two per cent inflation. The potential impact of these developments will be further analyzed in the bank’s upcoming economic forecasts in October.
The uncertainties surrounding trade relations have clouded the economic outlook, with experts noting the challenges posed by trade tensions and the potential implications of existing tariffs on key sectors. Despite these uncertainties, the Bank of Canada is closely monitoring developments and remains prepared to adjust policy measures as needed.
In the bond market, while the central bank influences short-term borrowing costs, longer-term rates are determined by the bond market. Global factors, including expectations of rate hikes by the U.S. Federal Reserve, have led to an increase in treasury yields, impacting Canada’s bond market.
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. Economists expect the Bank of Canada to maintain its key rate at the upcoming announcement on October 28.
