Bank of Canada’s Governor Tiff Macklem raised concerns about the increasing inflation risk, highlighting that escalating energy costs and incoming dollar-for-dollar tariffs on U.S. goods could be key drivers of price hikes for consumers and businesses in Canada. Following the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, Macklem emphasized that the ongoing conflict in the Middle East and the surge in oil prices pose significant inflationary risks.
The recent data affirmed the central bank’s expectations of a broadening economic recovery, although the uncertainties stemming from the Middle East conflict and U.S. tariffs were noted to heighten the inflation risk. Notably, U.S. benchmark oil prices have surged approximately 13 per cent since the previous bank announcement in July, attributed to the intensified U.S.-led war in Iran affecting global oil markets.
Moreover, the Canada-U.S. trade dispute has escalated, with President Donald Trump imposing substantial tariffs on Canadian products, reciprocated by Canada with corresponding tariffs on U.S. goods. To support affected workers and businesses, the Canadian government unveiled a $7.5-billion expanded economic relief program, supplementing the existing tariff support initiatives.
Macklem expressed concerns over the inflation rate reaching three per cent in July, primarily driven by higher gasoline and oil prices due to the Middle East tensions. The bank’s focus remains on achieving a two per cent inflation target, with upcoming economic forecasts crucial for future policy decisions. Analysts anticipate potential rate hikes of 75 basis points starting in the fourth quarter of 2026.
Amidst the uncertainties surrounding trade relations, CIBC’s chief economist Avery Shenfeld emphasized the challenge of predicting future economic trends. The recent hold on interest rates was deemed unsurprising given the trade war dynamics, with trade uncertainties posing additional risks. Shenfeld highlighted the importance of resolving existing tariffs on automobiles, metals, and lumber for economic projections.
As for the bond market, while the Bank of Canada influences short-term borrowing costs, longer-term rates are determined by the bond market. Macklem noted the impact of global bond yield movements on Canada, with the country’s yield curve positioned lower than U.S. treasuries. The benchmark 10-year Government of Canada bond yield rose to 3.80 per cent, marking a two-year high. Economists expect the central bank to maintain its key rate in the upcoming announcements on Oct. 28.