Bank of Canada Governor Tiff Macklem warned that new U.S. tariffs could slow Canada’s recovery and push fourth-quarter economic growth below 1% if they remain in place.
Speaking to the Halifax Partnership on September 21, Macklem said the Canadian economy had started to regain momentum after a weak stretch caused by tariffs, trade uncertainty and slower population growth. But he said the latest escalation in Canada-U.S. trade tensions could once again cause businesses to delay investment and hiring.
Macklem said the new U.S. tariffs would hit affected sectors hard, though the Bank of Canada does not expect a large direct effect on the economy as a whole. The affected products represent about 5% of Canada’s goods exports to the United States, and federal support programs are expected to soften some of the impact.
The broader concern is uncertainty. According to Macklem, businesses had spent much of the past year adapting to higher tariffs by adjusting supply chains, changing sourcing strategies and reducing exposure to tariff-hit trade flows. A new round of tariffs could interrupt that progress.
If businesses pause again to reassess trade risk, the result could be weaker investment, slower hiring and softer demand through the end of the year. Macklem said that if the latest tariffs remain in place, fourth-quarter growth could be “roughly halved” to below 1%.
Growth had started to recover before the latest escalation
The Bank of Canada’s September 2 rate announcement said Canadian GDP rose 3.3% in the second quarter after very weak growth in the first quarter. The Bank said the rebound was broad-based, with stronger consumption, some improvement in housing activity, and gains in exports and business investment.
Macklem’s Halifax remarks pointed to the same rebound. He said non-energy exports rose 14.5% in the second quarter and business investment increased at an annualized rate of 8.8%. He also said more than two-thirds of Canadian exporters reported plans to expand into new markets over the next two years, including Europe and the Asia-Pacific.
That matters because the Bank’s message was not that the recovery had disappeared. It was that the recovery has become more fragile. The economy entered the summer on stronger footing, but renewed trade uncertainty now threatens to slow the progress businesses had started to make.
Inflation risk is coming from fuel prices too
The Bank of Canada is also watching inflation pressure from energy markets. In its September 2 decision, the Bank said CPI inflation had been hovering around 3% in recent months, mainly because of persistently higher gasoline prices. Excluding gasoline, inflation was 2.2% in July, while the Bank’s core measures remained close to 2%.
Macklem said the conflict in the Middle East has lasted longer than expected and has disrupted key shipping routes and refining capacity. Under normal conditions, the Bank estimates that every 10% increase in oil prices adds about 0.2 percentage points to CPI inflation. This time, the impact has been larger because refinery damage has pushed gasoline and diesel prices higher than crude oil prices alone would suggest.
If oil prices stay near US$100 per barrel, Macklem said inflation could edge up in the coming months. The Bank has been looking through the direct effect of higher oil prices so far because it has not seen much evidence that those costs are spreading broadly to other goods and services. But officials are watching for signs that higher fuel costs are becoming more persistent.
Why this matters for interest rates
The Bank of Canada held its policy rate at 2.25% on September 2, with the Bank Rate at 2.5% and the deposit rate at 2.20%. Governing Council said inflation and growth had evolved broadly as forecast, but it also said upside inflation risks had increased and new tariffs had made growth prospects more uncertain.
The September 16 summary of deliberations showed the tension inside the decision. Governing Council members agreed that high energy prices could lead to broader inflation if they persisted. They also recognized that weaker growth from trade uncertainty could keep inflationary pressure contained by leaving more slack in the economy.
That leaves the Bank in a difficult position. Raising rates could help contain persistent inflation but would also restrain an economy facing new trade headwinds. Holding rates steady could support growth, but only if higher fuel prices and tariff-related costs do not spread more broadly through consumer prices.
Macklem said monetary policy cannot reverse tariffs or change global energy prices. The Bank’s job, he said, is to assess whether these shocks will have lasting effects on inflation and economic growth, then adjust policy as needed to keep inflation close to the 2% target over time.
What businesses should watch next
The next major checkpoint is the Bank of Canada’s October 28, 2026 rate decision, when the central bank is also scheduled to release its next Monetary Policy Report. That update should give a clearer view of how the Bank is incorporating the latest tariff escalation, fuel prices and growth risk into its forecast.
For Canadian businesses, the near-term signals to watch are whether trade talks improve, whether U.S. tariffs remain in place, and whether elevated gasoline and diesel prices begin feeding into broader costs. Hiring and investment plans will also matter because the Bank has repeatedly pointed to business caution as a key channel through which trade uncertainty can slow growth.
Macklem also framed artificial intelligence as one of the forces reshaping the economy. He said many businesses are using AI to automate routine tasks and work more efficiently, though larger productivity gains will take time as companies redesign processes and invest in new ways of working.
The Bank’s current message is cautious rather than alarmist. Renewed tariffs and higher fuel prices have made the path ahead less predictable, with growth and inflation risks now moving in different directions.
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