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OTTAWA — The Bank of Canada stuck to the sidelines Wednesday as governor Tiff Macklem suggested the re-escalating trade war with the United States is not the only risk monetary policymakers are monitoring.
The central bank left its policy rate unchanged at 2.25 per cent for a seventh consecutive decision. The move was widely expected by economists.
The bank has been watching to see whether cost pressures from the war in Iran could spread into other pockets of the consumer basket.
Inflationary risks have only become sharper since the bank’s last decision in July, Macklem said Wednesday, with global oil prices still persistently high and no end in sight for the Middle East conflict.
The economy meanwhile had been rebounding ahead of new U.S. tariffs hitting a range of Canadian goods as of Aug. 22. Canada is planning a round of retaliatory tariffs on Sept. 8 and the United States has threatened further escalation.
Macklem suggested that the new duties would weigh on fourth-quarter growth and hit targeted sectors hard, but he does not foresee a “large direct impact” on the wider economy.
Because the economy was evolving broadly in line with the bank’s forecasts, governing council opted to keep the policy rate unchanged, Macklem said.
“Monetary policy cannot offset the effects of tariffs or influence global energy prices. What we can do is ensure global developments don’t jeopardize price stability in Canada,” he said.
Macklem was tight-lipped in a press conference with reporters after the decision about whether the bank is more concerned about inflation or growth risks in the midst of an uncertain outlook.
He said the inflationary risks from Canada’s counter-tariffs are “fairly modest” and that the global energy shock remains the biggest tailwind to higher prices.
Inflation was a full percentage point above the Bank of Canada’s two per cent target at three per cent in July, which Macklem said is too high for the bank’s comfort.
He said the Bank of Canada’s rate decisions are still guided by its inflation forecast, which will be updated at the next rate announcement on Oct. 28.
Frances Donald, chief economist at RBC, said Macklem “put a stake in the ground” by emphasizing the risks of higher inflation.
In doing so, he pushed back against expectations from most analysts that the central bank’s messaging would focus on threats to growth from a re-escalating trade war with the United States.
Donald said that, all things considered, Macklem is likely more worried about inflation reigniting than a hit to the economy. But that doesn’t necessarily imply rates are set to move higher.
“We have a tendency to think about central banks as having this binary — hawkish or dovish. Are they hiking or are they cutting?” Donald said.
“But what was interesting more to me today was how governor Macklem was prioritizing the multiple risks in play.”
Macklem said most of the things that will insulate the economy from tariff threats — like diversifying Canadian exports to new markets — are not in the Bank of Canada’s purview. Much of that work needs to be done by governments and the private sector, he said.
Before the latest U.S. tariffs came into effect, exports were starting to rise again. While Macklem warned that new trade restrictions could see business confidence hampered again, he also expressed some optimism about firms’ ability to cope with an uncertain status quo.
“Businesses have been adapting to an environment with more uncertainty, higher tariffs … they’re finding ways to do business,” Macklem said.
“That has put the Canadian economy on better footing going into this latest new wave of U.S. tariffs,” he said.
Donald said that momentum gives the Bank of Canada time to gauge how the trade war and inflationary pressures are working their way through the economy before acting.
It also allows the central bank to see what stimulus the federal government has in store in its fall budget, which could reduce the need for a monetary policy response.
“What Canada needs most is very targeted support to the people, sectors, and regions who need it most, and the Bank of Canada cannot provide that, just given the bluntness of their tools. This is a role for fiscal policy,” Donald said.
Stephen Brown, chief North America economist at Capital Economics, said in a note to clients that the central bank will likely need to see further signs of improvement in the unemployment rate or economic growth before raising the policy rate.
But given that global oil prices have shown little signs of easing, he said a rate hike at the bank’s final meeting of the year in December is now on the table.
Financial markets had three quarter-point hikes baked into their forecasts by mid-2027 as of Wednesday at noon — including one before the end of 2026 — according to LSEG Data & Analytics.
Odds of a hold at the Bank of Canada’s next decision in October stood at more than 92 per cent.
Donald noted that some of the need to respond to inflation risks is already being done through higher bond yields.
Global bond yields have been rising in recent weeks largely in response to concerns over U.S. debt and inflation.
The five-year Government of Canada bond yield hit its highest point in more than two years on Wednesday as markets repriced on expectations for rate hikes.
Because that yield informs key commercial lending rates and fixed-rate mortgages in the housing market, Donald said some of the tightening that would be accomplished by a policy rate hike is already underway.
This report by The Canadian Press was first published Sept. 2, 2026.
Craig Lord, The Canadian Press
