Bank of Canada Governor Tiff Macklem has highlighted the increasing risk of inflation, attributing it primarily to elevated energy costs and the imposition of counter-tariffs on U.S. goods. Macklem’s comments followed the Bank’s decision to maintain the benchmark interest rate at 2.25 per cent, a move in line with market expectations. This decision marks the seventh consecutive instance of the Bank keeping the policy rate unchanged since its reduction in October last year.
Macklem pointed out that the ongoing conflict in the Middle East poses a significant concern, particularly due to the resurgence in oil prices. He emphasized that prolonged tensions in the region could potentially lead to a broader impact on the prices of various goods and services. The Bank acknowledged recent data indicating a strengthening economic recovery but also highlighted the potential inflationary risks stemming from the Middle East conflict and U.S. tariffs.
The escalation of the Canada-U.S. trade dispute has further complicated the economic landscape. Following the recent imposition of tariffs by both countries, the Canadian government unveiled a $7.5-billion economic relief program to support affected individuals and businesses. These measures supplement the substantial tariff support totaling nearly $25 billion implemented over the past year and a half.
Macklem expressed concern over the inflation rate, which reached three per cent in July, surpassing the Bank’s target of two per cent. He attributed this spike to the conflict-related increase in gasoline and oil prices. Analysts anticipate the Bank’s forthcoming economic forecasts in October to provide crucial insights, with projections of rate hikes starting in the fourth quarter of 2026.
Amidst uncertainties surrounding trade relations and the impact of tariffs, economists like CIBC’s Avery Shenfeld foresee minimal rate adjustments for the remainder of the year. The bond market has also witnessed fluctuations, with Canada’s yield curve positioned below U.S. treasuries. Bank officials emphasized the importance of distinguishing between market volatility and instability, emphasizing the need to monitor potential risks associated with leveraged investors and liquidity.
Although global bond yields have influenced the Canadian market, Senior Deputy Governor Carolyn Rogers emphasized the current stability and lack of significant risks. The benchmark 10-year Government of Canada bond yield rose to 3.80 per cent, its highest level in over two years. A recent Reuters poll indicated a consensus among economists expecting the Bank of Canada to maintain its key rate during the next announcement slated for October 28.
