Bank of Canada Governor Says Tariffs Could Lead to Higher Prices Without a New Trade Deal
Bank of Canada Governor Tiff Macklem says a new trade and security deal between Canada and the U.S. would be great news for the Canadian economy, which relies heavily on trade with its southern neighbour.
“Getting back to open trade between our countries is key for keeping jobs and helping the economy grow,” Macklem said during a speech to the St. John’s Board of Trade. “It also matters for prices and inflation.”
Earlier this month, the Bank of Canada kept its main interest rate at 2.75% for the second time in a row. That’s partly because there’s still a lot of uncertainty about U.S. trade policy.
Macklem explained how U.S. tariffs on Canadian goods like steel, aluminum, and cars have hurt the economy. Canada has also placed its own tariffs on about $60 billion worth of U.S. goods in return, though there have been a few exceptions.
He said the tariffs have made it harder to control inflation. In April, core inflation went up more than expected. While the headline inflation rate was 1.7%, it would have been closer to 2.3% without the removal of the carbon tax, which is higher than what the Bank had predicted.
Canadian exports have also slowed down, hurting growth. “If these tariffs aren’t lifted, they will likely lead to higher consumer prices,” Macklem warned.
How quickly prices go up depends on demand and what people expect from inflation. Macklem added that companies might find it easier to raise prices if they can blame tariffs—and people may accept it if they’re already expecting prices to rise.
He gave an example from 2018, when Canada and the U.S. had a tariff dispute during Donald Trump’s first presidency. A 10% tariff was placed on certain goods, and Macklem said that about 75% of those costs were passed on to consumers over 18 months.
Earlier this year, exports jumped by 10% as companies rushed to ship goods before the tariffs hit. But in April, exports to the U.S. dropped over 15%. Steel exports fell 11%, aluminum 25%, and cars nearly 25%.
Some Canadian companies have started trading more with countries outside the U.S. Still, nearly two million Canadian jobs rely on trade with the U.S.
The unemployment rate rose to 7% in May—the highest since 2016. Jobs in trade-sensitive sectors, especially manufacturing, have dropped by 55,000 since January. Jobs in other industries are holding steady for now, but Macklem warned that job losses could spread if things don’t improve.
“If tariffs and uncertainty continue, both families and businesses will likely stay cautious,” he said. “And if demand stays weak, more businesses might start cutting jobs.”
He said the Bank of Canada is ready to cut interest rates again to help the economy if inflation stays under control.
“The recent progress on a new trade deal is a good sign, and we’re watching closely,” Macklem said. “The future of trade between Canada and the U.S. matters to all of us.”
