As discussions to forge a new trade and security agreement begin, Governor Tiff Macklem underscored the urgent need for resolution. He warned that if tariffs remain in place, Canadian consumers can expect higher prices in the months ahead.
Speaking to the St. John’s Board of Trade, Macklem outlined the broader economic impact of U.S. tariffs. These trade disruptions are already weighing on the country’s growth outlook and inflation trajectory, complicating the Bank of Canada’s policy decisions.
The central bank has held its policy rate steady at 2.75 per cent in its last two announcements. While headline inflation stood at 1.7 per cent in April, adjusted figures suggest core inflation is actually running closer to 2.3 per cent.
The persistence of tariffs is expected to elevate inflation as businesses pass rising costs onto consumers. While the pace of this pass-through depends on consumer demand and inflation expectations, history suggests the majority of these costs will eventually appear in retail prices. During the 2018 trade conflict under the previous U.S. administration, Canada saw nearly 75 per cent of tariff-related costs passed on to consumers over 18 months.
Recent data shows that the Canadian economy initially responded to new tariffs with a sharp increase in goods exports during the first quarter of 2025. However, this momentum has quickly faded. April saw Canadian exports to the U.S. fall by over 15 per cent, with key sectors such as steel, aluminium, and motor vehicles experiencing significant declines.
While some Canadian businesses have diversified their trade relationships by turning to markets beyond the U.S., the reliance on American buyers remains high. Nearly two million jobs are directly linked to exports to the United States. In May, the national unemployment rate rose to 7 per cent and the manufacturing sector alone has shed 55,000 jobs since January.
Although employment in other sectors has remained stable, Macklem warned that the labour market often lags behind broader economic shifts. Continued weakness in domestic demand and persistent trade uncertainty could prompt further job losses across the board if conditions do not improve.
Looking ahead, the Bank of Canada appears poised to implement further interest rate cuts to support a weakening economy. Macklem indicated that while inflation remains under control, monetary easing will be necessary to cushion the effects of declining exports, rising joblessness, and sluggish consumer spending.
Despite current challenges, the renewed negotiations between Canada and the U.S. offer hope for a more stable trade environment. The outcome of these talks will be crucial not only for future inflation management but also for protecting jobs and ensuring long-term economic growth.
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