Bank of Canada Governor Tiff Macklem has highlighted an increasing inflation risk, pointing to rising energy costs and incoming tariffs on U.S. goods as potential drivers of price hikes for consumers and businesses. Macklem’s comments came following the central bank’s decision to maintain its benchmark interest rate at 2.25 per cent, consistent with market expectations. The Bank of Canada has kept rates unchanged since December 2025, marking the seventh consecutive hold.

Macklem emphasized that the ongoing conflict in the Middle East and the resulting surge in oil prices pose significant inflationary risks. The central bank acknowledged recent economic data indicating a broadening recovery, but also raised concerns about the impact of the conflict and U.S. tariffs on inflation.

The escalation of the Canada-U.S. trade dispute has further complicated the economic landscape. Last month, President Donald Trump imposed substantial tariffs on Canadian products, prompting Canada to retaliate with equivalent tariffs on U.S. goods. In response to the escalating trade tensions, the Canadian government introduced a $7.5 billion economic relief program to support affected workers and businesses.

Canada’s inflation rate climbed to three per cent in July, primarily driven by increased gasoline prices influenced by geopolitical tensions in the Middle East. Macklem expressed unease about the elevated inflation rate, emphasizing the bank’s objective of achieving a two per cent inflation target.

CIBC chief economist Avery Shenfeld noted that the central bank’s decision to maintain rates was not surprising given the uncertainties stemming from the ongoing trade war. Shenfeld highlighted the heightened trade-related uncertainties as a significant factor affecting economic projections and outlook.

In the bond market, while the Bank of Canada controls short-term borrowing costs, longer-term rates are determined by market forces. Global bond yield fluctuations have impacted Canada, with Canadian bond yields remaining below U.S. treasury yields. Despite the volatility in bond markets, Bank of Canada officials expressed confidence in the current stability, emphasizing the importance of distinguishing between market fluctuations and potential instability.

The benchmark 10-year Government of Canada bond yield rose to 3.80 per cent, its highest level in over two years. Economists polled by Reuters unanimously predicted the central bank would maintain its key rate, with the next rate announcement scheduled for October 28.