Bank of Canada Governor Tiff Macklem talks inflation, tariffs and U.S. relations after G7 meetings

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Tiff Macklem has been wearing two hats this week. One is central banker, with an eye glued to the latest inflation numbers. The other is international statesman, playing host to the world’s most influential economic policy-makers in Banff and working to mend Canada’s relationship with the United States, which has been damaged by President Donald Trump‘s erratic trade policies.

As co-chair of the G7 finance ministers and central bankers meeting – alongside Finance Minister François-Philippe Champagne – the Governor of the Bank of Canada has spent the past few days shuffling from room to room in the Rimrock Resort, high in the Rocky Mountains, meeting with counterparts from the United States, Japan, Britain, France, Italy and Germany.

The gathering produced no breakthroughs on tariffs and trade. But there were no public spats. And the group, which included U.S. Treasury Secretary Scott Bessent, found enough common ground on issues such as Chinese industrial subsidies and financial crime to cobble together a joint communiqué.

Amid the high politics, Mr. Macklem couldn’t entirely escape his day job. On Tuesday, Statistics Canada published the latest inflation numbers, which showed a drop in headline inflation but a worrying rise in core measures, leading financial markets to pare back bets on another interest rate cut at the Bank of Canada’s next monetary policy announcement on June 4.

The Globe and Mail spoke with Mr. Macklem about the latest inflation data, the likelihood of further tariff relief, the recent rise in U.S. Treasury yields and what it’s like working alongside Prime Minister Mark Carney – his old boss at the Bank of Canada.

I’ve got to ask the question nobody asked at the closing news conference. Headline CPI inflation dropped to 1.7 per cent, but some core inflation measures moved above 3 per cent. How are you interpreting the latest inflation numbers for April, and are you going to be focusing on the core measures or the headline number heading into the June meeting?

I was a bit surprised nobody asked me about that. Don’t forget about inflation!

The headline number did come in a bit stronger than we were expecting. I think I said at the last press conference, we expected it to come in around 1.5.

We’ve had a number of tax changes that have been having an effect on headline inflation. There was the GST holiday on some goods and services. As that came off, you saw CPI go up. Now, carbon tax elimination comes in. That’s pulling headline inflation down. These are price-level effects, so we will try to largely look through them.

There is also, though, more volatility in underlying inflation. In the last number of months, in particular, we’ve seen big swings in travel tours, and that’s about 1 per cent of the CPI.

Looking through, yes, you‘re seeing food price inflation up a bit. So there are some components that are a bit firmer. We’ve been pretty heads down here for the last three days. So we’ll have to take a closer look at that. Obviously, we’re getting retail trade data Friday. We’ll get the national accounts next week. So we’ve got a number of things still to come before we get to our next monetary policy decision.

There was no additional tariff relief announced between Canada and the U.S. After discussions with Mr. Bessent, Federal Reserve chair Jerome Powell and other U.S. officials, how confident are you that we’re going to see more tariff relief going forward and in what kind of timeline would you expect?

This wasn’t the place to have a Canada-U.S. negotiation. This was really about hosting G7 meetings, to have a forum for a frank, open discussion. I was encouraged by the tone of the discussion. I was encouraged by the atmosphere. I think it was more collegial, more constructive, more positive.

We did discuss tariffs and discussed the need for further improvement. We discussed the need for fixing the global trading system. We welcome the fact that uncertainty is lower than it was last time we met, as the G7, back around the spring meetings in Washington, and we’d all like to see uncertainty come down further. And a big part of that, clearly, is reducing tariffs, greater clarity around trade policy. There‘s more work to do. And yes, Canada and the U.S. need to sit down and work through this.

What was the main message you took away from conversations with Mr. Bessent and Mr. Powell?

From Chairman Powell, the message is quite consistent with what he’s been saying in public: Tariffs pose some risk to growth. They pose some risk to inflation. Right now, the U.S. economy continues to perform well, and I think he’s comfortable with where monetary policy is.

From Secretary Bessent, I think the message was some recognition around uncertainty, and a real willingness to engage, to work together.

There‘s no question that the secretary sees value in the G7. I think the secretary is concerned that the global trading system is not working as well as it should, and I think that sentiment is shared across the G7, and we need to work together to get it working better for all of our countries.

We’re facing some of the same challenges. There was an extended discussion about nonmarket policies and practices. These aren’t new, but we need to measure them better, we need to assess their impact better. And then on global imbalances, I mean, they’re not new, either. But the fact we’ve been living with them for so long, I think, highlights the problem. They’re not going away.

Is that China, specifically, we’re talking about?

China would certainly be the biggest part of that. But it’s not only China.

Long-term U.S. Treasury yields have risen pretty sharply in the last month. Canadian bond yields are moving up too. How does this change how you‘re thinking about the proper setting for Canadian monetary policy?

Financial conditions are something that we look at when we’re assessing where the economy is and where it’s going. There‘s more to financial conditions than the bond market. You‘ve also got the equity market. You saw, obviously, the equity market went down pretty sharply following April 2. It’s come back. It’s actually above April 2.

And then you‘ve also got to look at businesses. When they’re raising debt, the government bond rate is kind of the benchmark, and they pay a credit spread over that. So you‘ve got to look at those credit spreads.

We’re looking at all those things. You‘re right. Bond yields have backed up – less in Canada than the United States, and the yield curve in Canada is quite a bit below the United States. But yes, that is something that we’ll be factoring in as we consider where the economy is headed and what that means for monetary policy.

It seems like bond markets are responding to concerns about debt sustainability. Are we entering a period where fiscal concerns become more prominent than they have been in the recent past, and what would that mean for interest rates going forward?

Bond markets, they adjust very quickly. When there‘s new information, they take that on board, and they reassess. And we’ve seen a lot of new information coming out in recent months. And so you‘ve seen a lot of volatility in the bond market. I think if we continue to see new announcements, shifts in policy, you‘re going to continue to see the bond market and the equity markets responding.

With respect to fiscal policy, I think we’ll see. There was some discussion in the meetings around fiscal policy. Getting back to the growth agenda, there‘s a recognition that there is a role for smart fiscal policies to make investments in key infrastructure that will advance productivity.

At the same time, there was a clear recognition that the word “smart” is important. And prudent fiscal policies are critical to growth. Because, if bond yields back up, that constrains growth, that increases the cost of credit. You know fiscal policy is not the domain of central bank governors. It’s the domain of finance ministers. But yes, I think there was some recognition you‘ve got to keep those in balance.

How has your outlook for the economy changed since the April Monetary Policy Report, and where do you see the balance of risks between inflation on the one side and a potential recession or economic slowdown on the other side right now?

We’ve still got some more information to come – retail trade, national accounts – so it’s premature to give you that assessment. In the April MPR, we had these two scenarios: the not-so-bad scenario, scenario one, and the really bad scenario, scenario two. We’re still somewhere in between those, but I think the direction of travel has been more toward scenario one.

My hope is that by the time we get to July, we can move back to a more conventional forecast, or at least a central scenario with perhaps a couple of risk scenarios around that. Uncertainty has come down. But look, it’s still elevated. There‘s still work to do. Hopefully it continues to come down and we can get back to a central scenario. And I just I hope I’m not disappointed in that hope.

With your old boss’s recent election win, is the Bank of Canada doing anything differently now that a former Governor is the Prime Minister?

I’m the Governor of the Bank of Canada. We’ve got a clear mandate, and we’re focused on what we need to do. And I expect Prime Minister Carney, he’s focused on what he needs to do. Obviously, in the Prime Minister you‘ve got somebody who knows a lot about the economy, knows a lot about monetary policy, knows a lot about the global financial system, and I expect he will use that to the benefit of Canadians.

This interview has been edited for length and clarity.