The governor says May's price spike traces to the war in Iran, not a broader problem
Inflation in Canada hit its highest level since late 2023 in May, yet Bank of Canada governor Tiff Macklem says the spike is not spreading through the economy.
Statistics Canada reported, as cited by BNN Bloomberg, that inflation jumped to 3.2 percent last month, pushing past the central bank's 1-to-3-percent target band.
Speaking to reporters from Paris on Tuesday, Macklem traced the rise almost entirely to the energy shock from the war in Iran.
"There's no evidence of generalized inflation. So far, the rise in inflation is very much reflecting the rise in global energy prices related to the war in Iran," he said, according to BNN Bloomberg.
He added that the recent peace agreement between the United States and Iran is already pulling down global oil prices and easing the inflation risk.
That read underpinned the central bank's decision to hold its policy rate at 2.25 percent for a fifth straight time on June 10, per a summary of deliberations the bank released this week.
Governing council weighed a clear dilemma, the summary said: the economy remained weak and below potential, while energy-driven prices ran above the 2 percent target.
Raising rates risked further weakening the economy if oil prices fell quickly, the Bank of Canada noted, while cutting them risked letting inflation become embedded in pricing behaviour and expectations.
"For the time being, members were prepared to look through the near-term impacts of higher energy prices on inflation," the summary read.
In a Paris speech the same week, Macklem turned to a longer-running threat with direct relevance for institutional investors.
Reuters reported that he singled out widening global imbalances, led by China's export surplus and US reliance on foreign capital, as a force that may be fuelling financial stability risks.
He flagged the growing role of non-bank intermediaries, naming hedge funds, private finance companies, pension funds and other asset managers, which Reuters noted generally do not face the same reporting requirements or monitoring as banks.
"But when flows become excessive, they can widen trade gaps, fuel protectionism and distort asset prices. Capital gets misallocated. Pressures cumulate and financial stability risks increase," Macklem said.
He warned that one-way capital flows can inflate asset bubbles, pointing to the run-up to the global financial crisis and, potentially, the current surge of investment in artificial intelligence.
According to the Financial Post, Macklem set out two risks in prepared remarks.
He named two risks.
First, large inflows into the US could be misallocated, stretching equity and credit valuations and setting up "a painful correction."
Second, those flows could reverse suddenly. Either outcome could push stress well beyond US borders.
He stressed Canada's exposure over its blame, saying it does not fuel global imbalances but "could be sideswiped if financial stability risks crystallize," the Financial Post reported.
On the domestic picture, the Bank of Canada said the economy edged down 0.1 percent in the first quarter, well short of the 1.5 percent growth it had projected in April, but council judged Canada was not in recession.
"While the economy shrank in the fourth quarter of 2025, GDP growth was barely negative in the first quarter of 2026, and more than half of industries recorded some growth," the summary read.
Recent data pointed to a second-quarter rebound, the bank added, with a flash estimate showing GDP up 0.4 percent in April.
The Financial Times reported that the labour market stayed soft, with the unemployment rate fluctuating between 6.5 and 7 percent and employment little changed since the start of the year.
Members said policy will need to stay nimble, the summary noted, with rate cuts possible if the United States imposes new trade restrictions and rate increases possible if energy-driven inflation persists.
"It is also possible that both risks could materialize at the same time," the Bank of Canada concluded.
The central bank will release updated forecasts alongside its next rate decision on July 15.
