Bank of Canada Governor Warns Higher Fuel Costs and U.S. Tariffs Could Renew Inflation Risks
By Victor Brooks
Bank of Canada Governor Warns Higher Fuel Costs and U.S. Tariffs Could Renew Inflation Risks
The Bank of Canada held its benchmark interest rate at 2.25% on Wednesday, with Governor Tiff Macklem warning that higher fuel prices and U.S. tariffs are creating fresh risks for inflation.
The decision came after Canada’s economy grew faster than expected in the second quarter, expanding at an annualized 3.3% rate. But inflation has also picked up, with the consumer price index rising above 3% in July, putting greater focus on whether the recent increase will persist.
Macklem said higher gasoline prices are already contributing to the increase in headline inflation. He also pointed to the potential impact of higher oil prices on other parts of the economy if the increase lasts longer than expected.
The governor’s comments come as oil markets remain sensitive to the conflict in the Middle East. Higher crude prices have pushed up fuel costs, adding to the inflation pressure facing Canadian households.
At the same time, the bank is assessing the effect of the U.S. tariffs on Canadian businesses. The latest trade measures have increased uncertainty for exporters and companies making investment decisions, while Canada’s retaliatory tariffs could raise the cost of some imported goods and inputs.
Macklem said the direct economic impact of the latest U.S. tariffs may be limited, but prolonged uncertainty over trade could weigh on hiring and investment.
That leaves the bank watching two developments at once: whether stronger economic activity continues and whether the recent rise in inflation spreads beyond energy and other temporary factors.
For now, the Bank has chosen to leave borrowing costs unchanged.
The decision also reflects the difference between headline inflation and the underlying measures being watched by policymakers. While headline inflation has moved above 3%, core inflation remains closer to the Bank’s 2% target, giving officials room to wait for more evidence before changing rates.
The stronger second-quarter economic performance also reduces the immediate pressure for another rate cut. The Canadian economy had contracted in the first quarter, but the latest GDP figures showed a stronger rebound than economists had expected.
The Bank nevertheless expects trade uncertainty to remain a drag on the outlook. Companies are still adjusting to changes in the Canada-U.S. trading relationship, making the strength of the recovery difficult to judge from one quarter of growth.
The inflation outlook will, therefore, remain central to the Bank’s next decisions.
If higher fuel prices fade and core inflation remains contained, policymakers could continue holding rates at 2.25%. But a broader increase in underlying inflation would make it more difficult to maintain an easing bias.
For markets, the next inflation readings will be important. They will help determine whether the latest increase is largely an energy-driven move or the beginning of broader price pressure.
The Bank’s next scheduled interest-rate decision will provide another test of that outlook as policymakers weigh incoming inflation, growth, and trade data.
