Bank of Canada Governor Tiff Macklem issued a stark warning on the economic consequences of prolonged US tariffs, emphasizing that broad-based and long-lasting trade barriers will depress Canadian exports, reduce overall output, and push consumer prices higher.

In a speech overnight, Macklem noted that the unpredictability of US tariffs, marked by “constant policy reversals”, has injected significant uncertainty into the outlook for Canadian businesses and households.

Macklem highlighted two major areas of concern: uncertainty about which tariffs will be imposed and for how long, and uncertainty about their economic impact.

Already, the BoC has observed that businesses are cutting back investment and hiring, and many households are growing more cautious with spending. He warned that if broad-based tariffs remain in place, the result will be “less demand, less economic growth and higher inflation”.

While monetary policy cannot prevent the initial rise in prices caused by tariffs, Macklem stressed that it must act to “prevent those initial, direct price increases from spreading”.

“We must ensure that higher prices from tariffs do not become ongoing generalized inflation,” he emphasized.

Full speech of BoC’s Macklem here.

Canada’s CPI jumped sharply from 1.9% yoy to 2.6% yoy in February, exceeding market expectations of 2.1%. This marks the first time in seven months that inflation has risen above the 2% mid-point of BoC’s target range.

A key driver of the surge was the expiration of a sales tax break in mid-February, which added to an already broad-based increase in prices. Without the tax impact, inflation would have hit 3.0%. On a monthly basis, CPI rose by 1.1% mom.

A closer look at the CPI basket shows widespread price increases across multiple categories. Food prices rose 1.3% yoy, while clothing and footwear climbed 1.4% yoy. Transportation costs surged 3.0% yoy, and shelter costs remained significantly elevated, rising 4.2% yoy.

Core inflation measures also pointed to underlying price pressures. CPI median rose from 2.7% yoy to 2.9% yoy, above expectation of 2.7% yoy. CPI Trimmed rose from 2.7% yoy to 2.9% yoy, above expectation of 2.8% yoy. CPI Common also rose from 2.2% yoy to 2.5% yoy, above expectation of 2.2% yoy.

With inflation climbing back above the BoC’s 2% target, speculation about another near-term rate cut has diminished. Unless major economic indicators such as GDP and unemployment show significant signs of deterioration, the central bank would probably pause the easing cycle at its next meeting.

Full Canada CPI release here.