By Michael O’Neill

Canadians may get clobbered with a candlestick which will be in the form of two consecutive rate hikes. It’s not a hallucination. The Bank of Canada Governor said as much in his press conference opening statement after leaving the policy benchmark rate unchanged at 2.25%. He warned that “there may be a need for consecutive increases in the policy rate.”

Who is he kidding? Sure, the comment was made in the context of an alternative scenario framed around a continuing Middle East conflict that drives energy prices higher. They fear the increases would in turn, feed generalized inflation.

Why bother? Why Now?

Canada does not have an inflation problem based on Statistics Canada and BoC metrics, which are displayed prominently on the bank’s website. They are all within the BoC inflation control target of 1-3%.

Do You See What I See?

The Governor is worried about the fallout from Trump’s war with Iran particularly its potential, longer-term impact on inflation. That seems like a legitimate concern, but it’s probably a more important concern for another day. It’s not as if there aren’t precedents for ignoring inflation increases.

During the post-pandemic recovery, policymakers repeatedly described rising inflation as “transitory.” Meanwhile, inflation climbed above the Bank’s 3% upper target band and stayed there for roughly a year before policymakers began raising interest rates in March 2022. By then, inflation was accelerating toward the 8.1% peak reached a few months later.

Governor Macklem eventually acknowledged the mistake, admitting the Bank had underestimated how persistent inflation would become.

The BoC was late to the party in 2021. Today, it risks being at the door before the bar even opens.

And Another Bogeyman is Looming.

President Trump is the 800-pound orange gorilla in the room. He has never been particularly fond of Canada, a relationship that has deteriorated steadily since the 2018 G-7 summit in Quebec where he accused then-Prime Minister Justin Trudeau of making “false statements.” In January 2025, Trump claimed Trudeau once told him Canada would become a “failed nation” without U.S. subsidies. Whether that conversation ever occurred is open to debate. Trump has a flexible relationship with the truth and Trudeau never publicly challenged the allegation.

That history now hangs over CUSMA negotiations.

If there was any doubt, Trump removed it Wednesday when he reminded reporters that the agreement comes up for review next year and openly questioned whether it should survive. “I don’t know that I’m going to renew it,” he said, before repeating his long-held belief that the United States needs little from either Canada or Mexico.

Those are not the comments of a leader looking for a win-win outcome.

And soon (if Trump was not bluffing), Canada’s trade minister Dominic LeBlanc will be sitting across the table from American negotiators who are not likely to view Canada as a trusted trade partner, but rather as a country leeching off of America. That perception, whether justified or not, may prove far more important to the future of the Canadian economy than anything currently showing up in the inflation data.

He’s Everywhere

President Trump has spent years demanding lower interest rates and there is little reason to believe he will stop now. The question is not whether Trump wants easier monetary policy. The question is how the Federal Reserve responds to the pressure.

A Warsh-led Fed could produce two very different reactions inside the FOMC. Policymakers closely aligned with Jerome Powell’s view of central bank independence may become even more resistant to rate cuts, fearing that any move toward easier policy will be viewed as capitulation to the White House. Others may point to alternative inflation measures, including the Dallas Fed’s trimmed-mean PCE and the Cleveland Fed’s median PCE indexes, as evidence that underlying inflation pressures are already easing.

Loonie Jumping at Shadows

The Loonie is as skittish as a tourist in a Tehran airport.

Hostile CUSMA negotiations could sink the Canadian dollar further than Trump’s approval ratings among Democrats. The resulting economic shock would leave the Bank of Canada with little choice but to cut interest rates, perhaps repeatedly, in an effort to cushion the blow. Those risks are immediate, visible and already hanging over the Canadian economy.

Runaway inflation is not.

If Macklem obsesses about inflationary risks from a prolonged Middle East conflict and determines the risks are not transient but entrenched, the BoC will err on the side of too soon rather than too late.

Whatever happens, Canadians and the Loonie may not escape the candlestick.