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Rates Unchanged as Bank Weighs Tariff and Energy Risks

Canadian Economics

By: Walter Bolduc

    

The Bank of Canada held the overnight rate at 2.25 per cent, the Bank Rate at 2.50 per cent, and the deposit rate at 2.20 per cent, the seventh consecutive hold since the easing cycle ended in October 2025. 

  • Canada’s economy grew 3.3 per cent annualized in the second quarter after a weak first quarter. The Bank attributes part of the gain to temporary factors but said the pickup extended across consumer spending, a partial rebound in housing activity, and sharp increases in exports and business investment. 
  • The unemployment rate fell to 6.4 per cent in July, and the labour market has shown resilience since May. Despite the improvement, overall hiring demand remains soft and the Bank continues to see spare capacity across the economy. 
  • CPI inflation has run near 3 per cent in recent months, driven mostly by persistently high gasoline prices. Inflation excluding gasoline was 2.2 per cent in July and core measures held close to 2 per cent, which the Bank reads as limited evidence so far of energy costs impacting other consumer prices. 
  • The global economy has held up against geopolitical pressures, with growth tracking the Bank’s July Monetary Policy Report projection. Growth in the U.S. is being carried by household spending and investment tied to AI, growth in the Euro area exceeded expectations in the second quarter, and growth in China slowed. 
  • Financial conditions are tighter than they were in July, with long-term bond yields up globally and in Canada, and the Canadian dollar has edged higher as the U.S. dollar weakened. 
  • Following the collapse of Canada–U.S. trade talks in August, the United States has imposed new tariffs on Canadian goods, with the federal government announcing countermeasures of similar value.  
  • Along with the trade dispute, the Middle East conflict is adding risk to inflation across the country, and threatening Canada’s economic recovery more broadly. 
  • The next interest rate decision is October 28, 2026, which will include the Bank’s quarterly Monetary Policy Report. 

Key Insights 

Trade tensions add further risk to the inflation outlook. Today’s announcement identifies new U.S. tariffs, Canadian counter-tariffs, and higher oil prices as sources of uncertainty for the inflation and growth outlook. While the federal government’s counter-tariffs are expected to increase the cost of some imported goods, their direct impact on inflation is likely to be modest given their targeted nature and the availability of substitutes for many affected products. The greater concern is further escalation in trade tensions. Additional rounds of tariffs or broader product coverage could raise costs, disrupt supply chains, dampen investment and trade activity, and weigh on economic growth. 

Core inflation near 2 per cent is keeping the Bank on hold. Headline inflation has hovered near 3 per cent since the spring, with higher gasoline prices accounting for much of the increase. By contrast, inflation excluding gasoline was 2.2 per cent in July, while the Bank’s core measures remained close to 2 per cent. The Bank cited this as evidence that higher energy prices have not yet spread to other goods and services. Although oil prices have risen and been above the Bank’s July forecast, it appears comfortable looking through the recent increase in headline inflation while underlying price pressures remain contained. However, a prolonged period of elevated oil prices and refinery margins would increase the likelihood that higher energy costs are passed through more broadly to consumers. The October Monetary Policy Report will provide updated oil price assumptions and a revised inflation forecast. 

We expect the policy rate to remain at 2.25 per cent through the end of 2026. However, the balance of risks has shifted. The Bank characterized upside risks to inflation as having increased and the economic outlook as more uncertain, while reiterating that it is prepared to adjust the policy rate if necessary. As a result, a rate increase appears more likely than a rate cut as the next move.

For more details about our outlook on the Canadian economy, please consult our Canadian Outlook.

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