Bank of Canada: New U.S. Tariffs Could Cut Fourth-Quarter Growth

Bank of Canada Governor Tiff Macklem said on Monday that new U.S. tariffs could push Canada’s fourth-quarter growth below 1%, reflecting a fresh wave of uncertainty threatening to hit investment and jobs.

Macklem said that, as the bank considered what to do with interest rates, it had to take into account that while slower growth could lower inflation, the Middle East conflict could push it up, as oil prices rise sharply.

Canada’s annual inflation rate is 3%, well above the bank’s 2% target, and could rise if oil prices remain near $100 a barrel, he said.

Canada’s economy rebounded in the second quarter, posting 3.3% annualized growth, as businesses and households began to adapt and plan investments and spending after nearly 18 months of U.S. tariffs.

But as a possible trade deal between the two longtime allies fell through, the rift between them has widened with new tariffs from the U.S.

“The latest escalation could cause businesses to again delay investment and hiring decisions. If these new tariffs stay in place, growth could roughly halve in the fourth quarter, to below 1%,” Macklem said.

The Middle East conflict has not only affected crude oil prices but has also damaged gasoline and diesel capacity, adding pressure on fuel costs.

Macklem said that without an easing of the U.S.-Iran conflict, the risk that inflation broadens and becomes more persistent has risen, although so far there is no evidence that higher fuel costs are spreading to other goods or services.

“We don’t want to raise our interest rate and dampen growth if inflationary pressures are contained. But we also don’t want to be too slow to react if inflationary pressures are becoming more persistent,” he said.