The Bank of Canada Governor Tiff Macklem said on Wednesday that the prospect of a new Canada-U.S. trade deal offers hope that tariffs will be removed, but cautioned that inflation could rise if tariffs stayed in place.

U.S. President Donald Trump and Canada's Prime Minister Mark Carney this week agreed to reach a trade deal between the two countries in 30 days that could possibly resolve a trade conflict triggered by U.S. tariffs and the subsequent Canadian counter duties.

"Restoring open trade between our countries is critical to jobs and growth in Canada," said Macklem in a speech in the Atlantic province of Newfoundland and Labrador.

"It is also important for prices and inflation," he said, calling the understanding between the two leaders as "very welcome news."

Trump has hit Canada with a barrage of tariffs on steel, aluminum and automobiles and Canada has retaliated with its own set of duties. The dispute between the two countries has hurt Canada's exports, and taken a toll on hiring and investment.

"If tariffs are not removed, we expect they will be passed through to higher consumer prices," Macklem said in his speech.

He said it was important for any deal between the two countries to roll back tariffs, given Canada's dependence on the U.S. market, which consumes three-fourth of its total exports.

"But until we have a deal, inflation will be affected by both U.S. tariffs and Canadian counter-tariffs," Macklem said.

Canada's annual inflation rate eased to 1.7% in April due to removal of some tax measures, but closely tracked core measures of inflation rose above the central bank's target range of 1% to 3%.

The Bank of Canada has also raised concerns that underlying inflation has been rising faster than expected and there was a chance that tariffs could keep prices higher for longer, its summary of deliberations from the bank's last monetary policy meeting showed.

If the current tariffs and counter-tariffs remain in place, past experience suggests pass-through of about 75% of the costs of tariffs over roughly 18 months, Macklem said.

He warned that while the Canadian economy has avoided mass layoffs so far, if tariffs and uncertainty continue, households and businesses will likely remain cautious and at some point more businesses will cut jobs.

Source: Investing.com