Bank of Canada Grapples With Rate Policy Amid Competing Forces, Macklem Says -- Update

By Paul Vieira

OTTAWA--Bank of Canada rate policy will be guided by how firms and households respond to the combination of elevated energy prices and a return to heightened trade uncertainty, said the central bank's governor, Tiff Macklem.

Central bank officials are prepared to adjust policy depending on these two dominant risks evolve, Macklem said.

"We don't want to raise our policy rate and restrain growth if inflationary pressures are contained. But nor do we want to be too slow to respond if inflationary pressures are becoming more persistent," Macklem said, according to prepared remarks for delivery in Halifax, Nova Scotia.

The speech indicated senior central bank officials are willing to take a limited wait-and-see approach on inflation before deciding whether a rate increase is necessary. Inflation is presently at 3%, or the top end of its target range. Readings that strip out volatile items like food and energy indicate price increases are closer to 2%, or the Bank of Canada's inflation target.

The Bank of Canada governor said he expects inflation to edge upward from 3% so long as crude-oil prices stay near the current $100 a barrel level. "The risk that inflation broadens and becomes more persistent has increased," Macklem said.

Yet, he said the escalation in the U.S.-Canada trade conflict, with the imposition of new hefty tariffs, is likely to weigh once again on investment and hiring decisions. "If growth weakens once again for several quarters, economic slack will persist, making it harder for businesses to raise prices," he said.

Macklem added that fourth-quarter growth could slow sharply to below 1% annualized should U.S and Canadian tariffs remain in place. In July, the central bank projected third quarter growth of 1.5%--after strong second-growth expansion of 3.3% that blew past initial Bank of Canada's expectations.

The yield on the two-year Canadian government bond has recently traded more than one-percentage-point higher than the Bank of Canada's policy rate of 2.25%, which indicates that fixed-income traders expect rate increases in the near future. The Bank of Canada kept its policy rate unchanged this month at 2.25%, although Macklem at a press conference adopted a more alarmed tone regarding inflation as the U.S.-Iran war shows no signs of ending. That conflict, which started in late February, has effectively shut down oil shipping through the Strait of Hormuz and damaged refinery capacity.

Macklem reiterated rate policy cannot either influence global energy prices or offset the impacts of the U.S.-Canada trade conflict. "What it can do is ensure that global developments do no jeopardize price stability in Canada," he said.

A good portion of Macklem's speech documented how Canadian businesses have adapted to the changing trade environment, as well as the adoption of artificial intelligence and aging demographics.

Second-quarter data showed a strong 14.5% climb in nonenergy exports, reflecting what Macklem said were business decisions to reduce their tariff exposure and adjust their supply chains. "Canadian businesses are building resilience by broadening their options," the governor said, adding that puts the economy on stronger footing amid a fresh bout of crossborder trade uncertainty.

Write to Paul Vieira at paul.vieira@wsj.com

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September 21, 2026 11:22 ET (15:22 GMT)