BoC governor hints that rate cuts may not be appropriate
by Erik Hertzberg
Bank of Canada Governor Tiff Macklem reiterated that he sees inflation running hotter than expected, while saying employment appears to be holding up outside of trade-intensive sectors.
In a wide-ranging speech on how the trade war is impacting the Canadian economy, Macklem flagged uncertainty about how tariffs and counter-tariffs may impact price pressures moving forward, repeating that “we can’t let a tariff problem become an inflation problem.”
Speaking in St. John’s, Newfoundland, Macklem pointed to core inflation gauges, including the bank’s preferred median and trim metrics, as suggesting underlying price pressures may be “firmer than we thought,” a major reason why the central bank held its policy rate at 2.75% earlier this month.
Those two measures rose at a 3.2% yearly pace in April — the highest in over a year. He also pointed to headline inflation excluding taxes of 2.3%, which was “slightly stronger than the bank had expected.” The removal of the consumer carbon tax pushed down the overall headline rate to 1.7%.
Macklem said some of the run-up in core inflation is due to higher goods and food prices, which may be starting to see the impact of US President Donald Trump’s tariffs and Canada’s counter-measures.
The speech confirms the bank is increasingly seized by the recent run-up in core inflation, and may be reluctant to resume monetary easing without more clarity on its persistence. And while officials expect the economy to weaken, uncertainty about how tariffs could increase inflation remains a question mark.
Speaking to reporters after his remarks, Macklem said there was “potentially some distortion” in the bank’s trim and median metrics, and that while underlying inflation is tracking “certainly above” the 2% target, it is “probably a little bit lower than our preferred measures.”
Macklem noted that Statistics Canada will release two inflation prints — including one next Tuesday — before the next rate decision on July 30 and the data will be key in weighing whether the firmness the bank is seeing in inflation is due to volatility or underlying pressure from trade disruptions.
“How temporary or persistent this is, I think, remains an open question,” Macklem said.
In the speech, Macklem warned that if inflation expectations are elevated, firms may more easily pass on the cost of tariffs because “people won’t be surprised to see higher prices.” Alternatively, if the economy slows and employment keeps weakening, falling demand could make it more difficult for firms to hike prices.
“If the current tariffs and counter-tariffs remain in place, past experience suggests pass through of about 75% of the costs of tariffs over roughly a year and a half,” Macklem said.
Macklem said the bank is already seeing the impact of tariffs on employment in trade-focused industries, but the broader labor market has held up so far. “We are watching closely for signs that weakness in the job market is broadening.”
While it’s still too early to see the direct effect of counter-tariffs in the inflation data, Macklem said the bank sees some indirect impacts from trade disruption. Businesses report higher costs as they search for other suppliers and new markets, he noted.
Diversification of trade adds “resilience,” Macklem said, and growing new markets for Canadian businesses limits vulnerabilities to trade barriers. He pointed to Newfoundland and Labrador’s oil exports to Europe as example, adding that only a third of the province’s goods exports are US-bound compared to three-quarters of Canada’s exports.
“We are proceeding carefully with monetary policy,” he said. “We want to see through the noise to set policy that supports the economy while ensuring inflation remains low and stable for Canadians.”
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