Bank of Canada Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, attributing it primarily to rising energy costs and the impact of incoming tariffs on U.S. goods. Macklem’s remarks followed the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, a move widely anticipated by economists. The bank has kept this rate unchanged for the seventh consecutive time since lowering it in October last year.

Macklem stated that while the tariffs could impose additional costs on certain businesses, the more significant issue is the ongoing conflict in the Middle East. He highlighted the resurgence of the conflict leading to a rise in oil prices, which could potentially spill over into affecting prices of other goods and services.

The Bank of Canada acknowledged recent data indicating a strengthening economy but also warned of the heightened risk of inflation due to the Middle East conflict and U.S. tariffs. The surge in U.S. benchmark oil prices following recent developments in the Iran war has further exacerbated concerns, impacting global oil markets.

Moreover, tensions between Canada and the U.S. have escalated recently, with reciprocal tariffs imposed on each other’s products. This escalation has prompted the Canadian government to introduce a $7.5-billion expanded economic relief program to support affected workers and businesses.

Macklem expressed displeasure at the current inflation rate of three per cent in Canada, emphasizing the bank’s target of achieving a two per cent inflation rate. The conflict in Iran has directly affected oil prices, contributing to the heightened inflation levels.

Analysts, such as Derek Holt from Scotiabank, anticipate a series of rate hikes totaling 75 basis points to start in the fourth quarter of 2026. However, uncertainties surrounding trade relations, especially amid the ongoing trade war, have clouded the economic outlook, leading to a cautious approach from the Bank of Canada.

While the central bank can influence short-term borrowing costs, longer-term rates are determined by the bond market. Global bond yield fluctuations have impacted Canada, with the benchmark 10-year Government of Canada bond yield reaching its highest level in over two years. Despite these fluctuations, Bank of Canada officials remain vigilant for any signs of market instability or liquidity issues.

A recent Reuters poll of economists indicated a unanimous expectation for the bank to maintain its key rate during the most recent announcement. The next rate decision is scheduled for October 28, as policymakers continue to monitor economic indicators and global developments.