Bank of Canada Governor Tiff Macklem has warned that new tariffs imposed by the United States could cut Canada’s fourth-quarter economic growth roughly in half, pushing it below 1% if the levies remain in place.
Macklem said the central bank is also weighing the effect of persistently high oil prices, noting that if crude remains near $100 a barrel, inflation is expected to edge higher in the coming months. He pointed out that fuel prices have climbed more than the Bank would normally expect, which he attributed to damage to global refining capacity. According to Macklem, recent gas prices have behaved as though oil were priced almost $40 higher than its actual level.
Balancing Growth Risks Against Inflation
The governor said that, so far, there is no evidence that higher oil prices are feeding through into the prices of other goods and services. He said the Bank does not want to raise interest rates and further restrain growth if inflationary pressures remain contained. At the same time, he cautioned that policymakers do not want to be too slow to act if those pressures turn out to be more persistent than expected.
Macklem said that when making rate decisions, the Bank needs to look past the initial shock from higher oil prices to assess the underlying inflation trend.
Businesses Adapting to Tariffs
Despite the growth warning, Macklem noted there is growing evidence that many Canadian businesses have already begun adjusting to the new US tariffs. He also said the Bank expects growth in Canada’s labour force to be close to zero over the next few years.
The comments underscore the competing pressures facing the central bank: tariffs threaten to significantly slow economic activity, while elevated oil and fuel prices carry the risk of pushing inflation higher. Macklem’s remarks suggest the Bank intends to monitor closely for signs that energy-driven price increases spread into broader inflation before making further rate decisions.
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