Bank of Canada Governor Tiff Macklem has emphasized the growing inflation risk, highlighting increased energy costs as a key factor driving potential price hikes for consumers and businesses, surpassing the impact of incoming tariffs on U.S. goods. Macklem made these comments following the decision by Canada’s central bank to maintain its benchmark interest rate at 2.25 per cent, a move widely anticipated by experts. The bank has held this rate steady since October of last year, marking the seventh consecutive meeting without adjusting the policy rate.
Macklem expressed concerns about the escalating conflict in the Middle East, stating that the resurgence of hostilities has led to a rise in oil prices. He emphasized that prolonged tensions in the region could result in spillover effects on the prices of various goods and services, posing a significant inflationary risk. The central bank acknowledged recent data indicating a broadening recovery in the economy but also highlighted the potential inflationary impact of the ongoing war and U.S. tariffs.
Meanwhile, the trade dispute between Canada and the U.S. has intensified, with President Donald Trump imposing substantial tariffs on Canadian products, prompting Canada to retaliate with equivalent tariffs on U.S. goods. In response to these developments, the Canadian government unveiled a $7.5 billion economic relief program to support affected workers and businesses, supplementing the previously implemented tariff support measures.
Canada’s inflation rate climbed to three per cent in July, attributed to the ripple effects of unrest in the Middle East impacting gas prices. Macklem expressed concern over the elevated inflation rate, emphasizing the bank’s objective of achieving a two per cent inflation target. Analysts, including Derek Holt from Scotiabank, anticipate potential rate hikes starting in the fourth quarter of 2026 based on upcoming economic forecasts.
CIBC chief economist Avery Shenfeld noted the uncertainties surrounding trade relations and their impact on the economic outlook, emphasizing the need for caution amid the trade war environment. While the Bank of Canada’s decision to maintain rates was expected, Shenfeld highlighted the lingering uncertainties over trade policies and their potential implications for future rate adjustments.
As global bond yields rise, the Canadian bond market remains influenced by developments in the U.S. treasury market. Bank of Canada officials highlighted the importance of monitoring market dynamics to distinguish between normal volatility and potential instability. While Canada’s yield curve remains below U.S. treasuries, concerns persist over the impact of rapidly changing investor sentiments on market liquidity.
The benchmark 10-year Government of Canada bond yield surged to 3.80 per cent, reaching its highest level in over two years. A recent poll of economists indicated unanimous expectations for the Bank of Canada to maintain its key rate in the latest decision, with the next rate announcement scheduled for October 28.