Rates

Macklem warns new tariffs could halve growth as oil keeps inflation near 3%

In Halifax, the Bank of Canada governor said growth could slip below 1% in the fourth quarter while oil near US$100 is likely to push inflation higher, leaving the door open to a rate hike.

By John Wilson · September 21, 2026

Bank of Canada Governor Tiff Macklem said Monday that the economy is being pulled in two directions at once: renewed U.S. trade aggression threatens growth, while the war in the Middle East keeps fuel prices and inflation elevated. Speaking to the Halifax Partnership, he said that if the latest U.S. tariffs stay in place, growth could be roughly halved in the fourth quarter, to below 1%.

At the same time, he warned that if oil prices stay near US$100 per barrel, the Bank would expect inflation to edge up in the coming months. The policy rate is 2.25%, where Governing Council left it on September 2.

The key numbers in the speech

Products hit by the new U.S. tariffs represent about 5% of Canada's goods exports to the United States
Non-energy exports rose 14½% in the second quarter, their highest level since early 2025
Business investment rose at an annualized rate of 8.8% in the second quarter
CPI inflation has stayed around 3% in recent months, mostly because of fuel
Rule of thumb: every 10% rise in oil prices adds about 0.2% to CPI inflation, but refinery damage means recent gasoline prices are consistent with an oil price almost US$40 higher than where it has been

Adapting, then hit again

Much of the speech described how businesses had begun adapting to the trade conflict that started in 2025. Macklem said firms were reducing tariff exposure, reworking supply chains and finding customers beyond the United States, and that the economy entered the summer in a stronger position. More than two-thirds of exporters say they plan to expand into new markets over the next two years.

The breakdown of negotiations and the new tariffs threaten to push some firms back into what he called the reassessment stage, delaying investment and hiring. He said the direct effect on the overall economy should be limited and partly offset by federal support programs, but that unpredictability is the bigger problem.

Why a hike is on the table

The Bank has so far looked through the direct effect of higher oil prices, since there is little evidence the costs are spreading to other goods and services. But Macklem said the risk that inflation broadens and becomes more persistent has increased. “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,” he said.

At his press conference, he added that moving too slowly would likely mean raising rates very quickly and by more than if the Bank had acted earlier. He also noted that bond yields have risen in Canada, though they remain below U.S. levels. The Bank will use a new forecasting model, called Prima, for the first time in its October Monetary Policy Report.

The counter-argument

Macklem stressed that the economy remains in excess supply. If trade uncertainty weakens growth for several quarters, that slack would make it harder for businesses to raise prices, which argues against tightening. Canadian counter-tariffs mostly target non-consumer goods with domestic substitutes, so the Bank expects only a modest inflation effect from them.

What it means for Canadian households

The message is that the next move, if there is one, is more likely up than down. Fixed mortgage rates already follow bond yields, which have been climbing; variable-rate borrowers would feel any policy hike directly through prime. Households renewing in the coming months may want to compare offers early and stress-test their budget against higher payments. This is general information, not personalized advice.

Sources

General news and information, not individualized financial advice. Figures reflect the publication date.