Bank of Canada (BoC) Governor Tiff Macklem said the central bank must ensure it does not raise interest rates late if inflationary pressures persist. At a speech yesterday, he said there are upside risks to inflation. Meanwhile, he said fresh Canada-US trade tensions could have an impact on export-reliant sectors, but the impact on Canada’s overall economy may be limited.

• Macklem noted the BoC does not want to raise interest rates if inflation remains contained to energy prices. However, he says the ongoing tensions in the Middle East could keep inflation elevated and broaden to other consumer products.
• He said the BoC does not want to move to restrict economic growth but needs to ensure the BoC doesn’t wait too long to lift interest rates to combat stubbornly elevated inflationary pressures.
• The BoC is carefully monitoring the impact of new US tariffs. Macklem reiterated that tariffs could push consumer prices higher if they are not removed.
• Macklem sees new US tariffs hurting tariff-affected sectors but may have a relatively small impact on the overall economy. He noted that the tariff hit products make up just 5% of Canada’s goods exports to the US.
• A sector that could be hurt is the potash industry. Most of Canada’s exports goes to the US. US President Donald Trump said he is closing in on a deal to import potash at a cheaper price from Belarus. The move was seen as a way for Washington to reduce its reliance on Canadian potash.

Macklem’s speech is a reminder that trade tensions are shaping up to be as much a monetary-policy story as an economic one. The BoC could be forced to raise interest rates if tariffs push already elevated inflationary pressures higher. Macklem’s comments suggest the BoC will need to tread carefully to contain inflation but not weigh on economic growth.

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