Bank of Canada Governor Tiff Macklem has expressed concerns about the increasing risk of inflation, citing the surge in energy prices as a key factor. This inflation risk surpasses the impact of Canada’s retaliatory tariffs on U.S. goods, potentially leading to higher costs for consumers and businesses.

Macklem’s comments followed the Bank of Canada’s decision to maintain its benchmark interest rate at 2.25 per cent, aligning with economists’ expectations. The central bank has kept the rate unchanged since December 2025, marking the seventh consecutive meeting with no adjustments.

Addressing reporters in Ottawa, Macklem highlighted the challenges posed by the ongoing conflict in the Middle East. He emphasized that the resurgence of the conflict has led to a spike in oil prices, posing a significant risk of spillover effects on the prices of various goods and services.

While the bank acknowledged recent data supporting a broadening economic recovery, policymakers cautioned about the potential inflationary impact of the Middle East conflict and U.S. tariffs. Notably, U.S. oil prices have surged approximately 13 per cent since the previous announcement in July, driven by geopolitical tensions affecting global oil markets.

Simultaneously, tensions in the Canada-U.S. trade war have escalated, with President Donald Trump imposing 50 per cent tariffs on Canadian products worth around $28 billion. In response, Canada initiated dollar-for-dollar tariffs on $27.6 billion worth of comparable U.S. goods, further intensifying trade disputes between the two nations.

To address the economic fallout, the Canadian government unveiled a $7.5-billion expanded relief program for affected workers and businesses, supplementing the existing tariff support initiatives totaling nearly $25 billion over the past 18 months.

Macklem expressed concern over the rise in Canada’s inflation rate to three per cent in July, primarily driven by heightened tensions in the Middle East impacting oil prices. The central bank aims to maintain two per cent inflation and is closely monitoring economic forecasts to gauge the need for potential rate adjustments.

Experts like Derek Holt anticipate rate hikes totaling 75 basis points starting in the fourth quarter of 2026, contingent on economic developments and market conditions. Amid uncertainties surrounding trade relations, economists like CIBC’s Avery Shenfeld foresee minimal prospects for rate changes this year, emphasizing the volatile nature of oil markets and trade disputes.

While the Bank of Canada influences short-term borrowing costs, longer-term rates are determined by the bond market. Macklem highlighted the spillover effect of global bond yield movements into Canada, underscoring the importance of distinguishing between market volatility and instability to mitigate risks posed by leveraged investors and liquidity concerns.

The benchmark 10-year Government of Canada bond yield surged to 3.80 per cent on Wednesday, its highest level in over two years, reflecting market dynamics influenced by global economic conditions. A recent Reuters poll indicated unanimous expectations among economists for the Bank of Canada to maintain its key rate in the upcoming October announcement.