Bank of Canada Governor Tiff Macklem has indicated that the threat of inflation is increasing, primarily due to rising energy expenses, which are now the leading factor, surpassing the new dollar-for-dollar tariffs on U.S. imports that could drive up prices for both consumers and businesses.
Macklem’s comments on Wednesday followed the central bank’s decision to maintain its key interest rate at 2.25 percent, a move anticipated by economists. The central bank reduced its policy rate to this level in October of the previous year, and this recent decision marks the seventh consecutive meeting where the bank has kept its benchmark rate unchanged.
“The counter-tariffs, as well as the U.S. tariffs, will impose additional costs for some businesses,” Macklem stated to reporters in Ottawa. “These tariffs are quite significant, although they affect a relatively limited range of products.”
He emphasized that the more pressing concern is the ongoing conflict in the Middle East.
“The situation has intensified. Oil prices have risen again,” Macklem noted. “If this conflict continues for an extended period, the risk increases that it will impact the prices of various other goods and services.”
In its latest decision, the bank acknowledged that recent data supports its forecast for a “broadening recovery” in the economy. Nevertheless, policymakers warned that the conflict and U.S. tariffs heighten the likelihood of rising inflation.
Since the bank’s last announcement in July, U.S. benchmark oil prices have surged by approximately 13 percent. The U.S.-led campaign in Iran has escalated recently, causing a slowdown in tanker traffic through the Strait of Hormuz, which is a vital maritime route for global oil supplies.
Bank of Canada governor Tiff Macklem mentions that the central bank will revise its forecasts, but currently assesses the ‘inflationary impact of those counter-tariffs is fairly modest,’ while also stressing that the Middle East situation poses a greater threat to inflation.
Simultaneously, tensions in the Canada-U.S. trade conflict have escalated significantly since the bank’s last meeting in July.
Last month, U.S. President Donald Trump enforced 50 percent tariffs on approximately $28 billion worth of Canadian goods. Beginning Tuesday, Canada will respond with equivalent tariffs on $27.6 billion of similar U.S. products.
Last week, the federal government announced a $7.5-billion expanded economic relief program aimed at supporting affected workers and businesses. This new assistance adds to nearly $25 billion in tariff relief provided over the last 18 months.
Macklem: Inflation is ‘too high’
Canada’s inflation rate climbed to three percent in July, as conflicts in the Middle East influenced gas prices in Canada.
“That’s too high,” Macklem remarked, emphasizing the bank’s target of maintaining inflation at two percent. “This inflation is primarily concentrated in gasoline and oil prices, which are a direct result of the situation in Iran.”
Derek Holt, vice president and head of capital markets economics at Scotiabank, noted that Macklem is placing considerable importance on the bank’s upcoming economic forecasts set for October.
“There is a substantial amount of information to analyze before October 28, including inflation, employment, GDP data, and developments in energy markets and trade. However, the Bank of Canada has clearly opened the door for potential tightening as soon as the next meeting if conditions align,” Holt stated in a research note.
He anticipates that there will be a total of 75 basis points in rate increases beginning in the fourth quarter of 2026.
Concerns Over Trade Uncertainties
CIBC chief economist Avery Shenfeld expressed that Wednesday’s decision to hold the rate was expected “in the midst of a trade war environment.”
“The increased uncertainty regarding trade relations complicates the economic outlook too much to provide clear predictions for the future,” Shenfeld noted in a research note published following the announcement.
“The bank assessed that the direct effects of the latest round of tariffs would not be significant but highlighted that trade uncertainties pose an additional burden,” he added.
“It did not address the negative implications of not reducing the current tariffs on autos, metals, and lumber, which many economic forecasts had anticipated would occur.”
Shenfeld believes there is little chance of a rate adjustment in either direction during 2026, as both the oil market and trade war situations could change dramatically in the coming months.
Current Bond Market Situation
While the Bank of Canada maintains direct control over short-term borrowing rates, longer-term rates are determined in the bond market. In the U.S., treasury yields have surged to multi-year highs as investors seek higher returns, partly due to expectations that the U.S. Federal Reserve will raise its short-term benchmark rate.
“We are witnessing some influence from global bond yields in Canada,” Macklem remarked on Wednesday, noting that Canada’s yield curve remains significantly lower than U.S. treasury yields.
“It’s important to differentiate between volatility and dysfunction or instability as prices and yields fluctuate, since investors are adjusting their perception of risk,” Bank of Canada Senior Deputy Governor Carolyn Rogers explained to reporters.
“The vulnerabilities we have highlighted in our previous financial stability reports arise when leveraged investors quickly unwind their positions and liquidity diminishes,” she added. “That is the concern we monitor, but we do not see that happening at present.”
The benchmark 10-year Government of Canada bond yield rose above basis points to 3.80 percent on Wednesday, marking its highest level in over two years.
A Reuters survey conducted on August 22 indicated that all 35 economists polled expected the bank to keep its key rate steady on Wednesday. The Bank of Canada is scheduled to announce its next rate decision on October 28.