Bank of Canada officials expressed confidence that Canada’s economy had regained footing heading into the latest round of tariffs, but flagged growing concern over whether that momentum can hold amid rising inflation risks and trade uncertainty, according to a summary of deliberations released by the central bank.
The document outlines the discussion that led the Bank’s governing council to hold its overnight rate steady at 2.25 per cent for a seventh straight decision. Officials noted that second-quarter annualized growth of 3.3 per cent came in slightly above expectations, suggesting the economy had rebounded after flat growth the previous year.
Despite that stronger reading, the governing council agreed that the main risks facing the economy had increased since the Bank’s July Monetary Policy Report.
Energy Prices and Inflation Concerns
The summary pointed to elevated global energy prices, driven in part by renewed hostilities in the Middle East, as a factor that has kept Canada’s inflation rate above the Bank’s two per cent target for longer than expected. Officials said this raises the risk that higher gasoline prices could spread into the cost of other goods and services, potentially becoming broader, generalized inflation.
At the same time, the council noted that a new round of Section 338 tariffs likely dampened both business and consumer confidence, which could weigh on consumer spending, business investment and hiring, adding further uncertainty to the country’s growth outlook. The breakdown of trade negotiations, the imposition of new tariffs and threats of additional trade measures were all cited as contributing to that uncertainty.
Officials also noted a potential offsetting effect: economic weakness stemming from trade tensions could limit how much higher energy costs pass through to the broader economy, helping to keep inflationary pressures contained. The council agreed the economy remains in excess supply and that the labour market continues to be soft, even as overall economic growth broadens.
Rate Held Steady Amid Shifting Risks
“With the economy and inflation evolving broadly as forecast in the July (Monetary Policy Report), governing council decided to leave the policy interest rate unchanged at 2.25 per cent,” the summary stated.
The rate decision came after trade talks between Canada and the United States collapsed in late August. Prime Minister Mark Carney had directed Canadian negotiators to return to Ottawa after American officials introduced last-minute demands that he said would threaten Canada’s economy and sovereignty.
Following the rate announcement, Statistics Canada reported that the inflation rate held steady at three per cent year over year in August, as gasoline and grocery price growth slowed. Inflation had run hotter over the summer months, reaching 3.2 per cent in May and 2.8 per cent in June.
Governing council officials said they will continue to watch whether the economic recovery holds up as trade tensions with the U.S. persist, and whether energy-driven inflation begins to spread into other goods and services. Some economists cited in the report expect inflation to stay above the two per cent target as long as global oil prices remain elevated, keeping upward pressure on gasoline prices.
Bank of Canada governor Tiff Macklem has repeatedly said in recent months that the central bank remains committed to its two per cent inflation target and to serving as a “source of stability” for Canadians, though he has stopped short of signalling future rate moves. “The data we’ve received since our last decision was broadly in line with our forecasts,” he said at a news conference after the Sept. 2 announcement. “But as I’ve just outlined, the risks are shifting and we are prepared to adjust monetary policy as needed.”
The Bank of Canada is widely expected to hold its benchmark rate steady again at its next scheduled decision on Oct. 28, when it will also release its next quarterly Monetary Policy Report.
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