Bank of Canada Governor Tiff Macklem said the economy is showing clearer signs of expansion, but he warned that potential US tariffs could undermine that growth and increase volatility for the Canadian dollar and other assets. The comments come as trade policy uncertainty continues to cloud the outlook for Canada's recovery.
Signs of Economic Expansion
Macklem pointed to recent data that suggests the Canadian economy is gaining momentum. Consumer spending has held up, business investment is picking up, and the labor market remains tight. The governor described the expansion signals as “clearer” than in previous months, though he stopped short of declaring the recovery fully secure.
The Bank of Canada has kept its key interest rate at 4.5% since January, after a series of hikes aimed at taming inflation. With inflation now closer to the 2% target, the central bank has room to wait before making its next move. But Macklem made clear that the path forward depends heavily on what happens with trade.
The Tariff Threat
Potential US tariffs are the biggest wild card. Macklem said that if the United States imposes new duties on Canadian goods, the impact would ripple through the economy. Growth projections would be at risk, and the central bank would have to reassess its policy stance.
The governor did not specify which products might be targeted or when tariffs could come. But he noted that the mere threat is already creating uncertainty for businesses that make investment and hiring decisions. That uncertainty, he said, could slow the very expansion the Bank of Canada is starting to see.
Impact on the Canadian Dollar and Asset Volatility
Macklem also addressed the potential fallout for financial markets. He said US tariffs would likely put downward pressure on the Canadian dollar, making imports more expensive and adding to inflation pressures. At the same time, asset prices could become more volatile as investors price in the risk of a trade war.
The Canadian dollar has already weakened against the US dollar this year, partly on tariff fears. A further drop would complicate the Bank of Canada's job: a weaker loonie boosts exports but also raises the cost of imported goods, which could keep inflation above target. Macklem said the central bank is watching currency moves closely.
He also warned that broader asset volatility could spill over into Canadian markets, affecting everything from stocks to bonds. The Bank of Canada stands ready to act if financial stability is threatened, but Macklem stressed that the best outcome is to avoid tariffs altogether.
The governor's remarks underscore the delicate balance the central bank faces. The economy is finally showing sustained growth, but that progress could be undone by a trade dispute with Canada's largest trading partner. For now, the Bank of Canada will keep watching the data — and the White House.
