Bank of Canada Governor Tiff Macklem has highlighted the growing risk of inflation, pinpointing elevated energy costs as a key factor, along with the impact of Canada’s retaliatory tariffs on U.S. goods. Macklem’s statements coincided with the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with market expectations. The central bank had initially set this rate in October last year and has maintained it unchanged for the seventh consecutive time.
Macklem emphasized the potential cost implications for businesses due to the imposed tariffs, particularly noting the challenges posed by the ongoing Middle East conflict. He expressed concerns that prolonged conflict could lead to increased prices for a wide range of goods and services beyond energy-related sectors.
The bank’s assessment acknowledged recent data indicating a broadening economic recovery but also identified the risks associated with the Middle East conflict and U.S. tariffs in driving inflationary pressures. Notably, U.S. benchmark oil prices surged by approximately 13 per cent following the bank’s previous announcement in July, attributed to geopolitical tensions in the Middle East impacting global oil supply routes.
Amid escalating trade tensions, the U.S.-Canada trade dispute saw significant developments with President Donald Trump imposing tariffs on Canadian products, reciprocated by Canada with matching tariffs on U.S. goods. In response to these challenges, the Canadian government introduced a $7.5 billion expanded economic relief program to support affected workers and businesses, supplementing existing tariff support initiatives.
Macklem expressed concern over the elevated inflation rate in Canada, which reached three per cent in July, primarily driven by heightened gasoline and oil prices influenced by the Middle East conflict. Market analysts, including Scotiabank’s Derek Holt, anticipate potential rate hikes beginning in the fourth quarter of 2026, contingent on economic forecasts and external market developments.
CIBC chief economist Avery Shenfeld emphasized the uncertainties surrounding trade relations and their impact on economic outlook, noting the bank’s cautious approach in light of ongoing trade tensions. Shenfeld’s projections suggest minimal rate adjustments in 2026, given the fluidity of the oil and trade war landscapes.
While the Bank of Canada manages short-term borrowing costs, longer-term rates are influenced by the bond market. Bond yields have surged globally, with Canada’s yield curve remaining below U.S. treasuries. Bank officials highlighted the importance of distinguishing between market volatility and instability, emphasizing the need to monitor leverage risks and liquidity conditions.
The surge in the benchmark 10-year Government of Canada bond yield to 3.80 per cent, marking a two-year high, reflects market dynamics influenced by global economic factors. Economists anticipate the Bank of Canada to maintain its key rate in the upcoming October 28 announcement, aligning with market expectations.