Bank of Canada Governor Tiff Macklem has highlighted the increasing risk of inflation, particularly due to surging energy costs and the imposition of dollar-for-dollar tariffs on U.S. goods. Macklem’s comments followed the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 per cent, in line with economists’ expectations. This marks the seventh consecutive meeting where the central bank has opted to keep the rate unchanged since lowering it in October last year.
Addressing reporters in Ottawa, Macklem emphasized the potential impact of tariffs on businesses, stating, “The counter-tariffs, and indeed the U.S. tariffs, will impose additional costs on certain businesses.” He expressed concerns about the conflict in the Middle East, noting that escalating tensions have caused oil prices to rise, which could lead to broader inflationary pressures on various goods and services.
The bank’s latest assessment confirmed a strengthening economic recovery, but policymakers cautioned that the ongoing war and trade tariffs pose risks of heightened inflation. U.S. benchmark oil prices have surged approximately 13% since the previous bank announcement in July, partly influenced by the escalating U.S.-led conflict in Iran disrupting oil supply routes.
Meanwhile, the trade dispute between Canada and the U.S. has intensified, with President Donald Trump imposing significant tariffs on Canadian goods, reciprocated by Canada with equivalent tariffs on U.S. products. The Canadian government recently introduced a $7.5-billion expanded economic relief program to support affected workers and businesses, supplementing the previous $25 billion in tariff relief measures implemented over the past 18 months.
Macklem expressed concern over Canada’s inflation rate reaching three per cent in July, primarily driven by increased gasoline prices resulting from Middle East tensions. He emphasized the bank’s target of achieving two per cent inflation and acknowledged the need for careful consideration of upcoming economic forecasts due in October.
CIBC chief economist Avery Shenfeld highlighted the uncertainties stemming from the ongoing trade tensions, indicating that the bank’s decision to maintain the interest rate was expected amid the trade war environment. Shenfeld emphasized the impact of trade uncertainties on economic projections and expressed skepticism about rate changes in 2026, given the volatile oil and trade scenarios.
While the Bank of Canada directly influences short-term interest rates, long-term rates are determined by the bond market. Macklem noted the impact of global bond market fluctuations on Canada, with the country’s yield curve remaining below U.S. treasuries. Despite the rise in government bond yields, senior officials reassured that the financial system remains stable, with no signs of instability currently observed.
Economists polled anticipated the Bank of Canada would retain its key rate during the recent meeting, with the next rate announcement scheduled for October 28th.