Investing.com -- New US tariffs could reduce Canada's fourth quarter growth to below 1%, Bank of Canada Governor Tiff Macklem said on Monday. The central bank faces competing pressures as slower growth could push inflation down while the Middle East conflict could drive it higher through rising oil prices.

Canada's annual inflation rate stands at 3%, above the bank's 2% target. Macklem said inflation could rise further if oil prices remain near $100 per barrel.

The Canadian economy grew at an annualized rate of 3.3% in the second quarter as businesses and households adjusted their plans after nearly 18 months of US tariffs. The Bank of Canada had forecast third quarter growth of 1.5% in July, before the latest tariffs were announced.

"The latest escalation could once again cause businesses to delay investment and hiring decision," Macklem said. "If these new tariffs remain in place, growth could be roughly halved in the fourth quarter, to below 1%."

The Middle East conflict has affected crude oil prices and damaged gasoline and diesel capacity, adding pressure to fuel costs. Macklem noted that while the risk of broader inflation has increased, there is no evidence yet that higher fuel costs are spreading to other goods or services.

"We don't want to raise our policy rate and restrain growth if inflationary pressures are contained. But nor do we want to be too slow to respond if inflationary pressures are being more persisent," he said.

The governor said businesses have been reducing their exposure to tariffs by changing supply chains and sourcing strategies since the trade war began. Companies are also adopting AI technology, though its impact on productivity will take time to show. Slower population growth and an aging population are affecting labor supply and consumer demand.