The Bank of Canada held rates steady for the seventh time—but left the door slightly ajar for a future hike.

The question is how much of the second-quarter strength is sustainable. Statistics Canada itself notes that the 2.1% growth in household disposable income stemmed 'primarily from wages and higher government transfer payments', while the increase in transfers was 'mainly due to a one-time Goods and Services Tax (GST) credit top-up issued in June'—a transitional measure ahead of the Canada Groceries and Essentials Benefit, which takes effect in July. The FIFA World Cup boosted arts and entertainment by 1.1% and urban transit by 1.7% in June; travel package prices surged 15.2% year-on-year in the July CPI. Bartlett therefore dubbed the second quarter 'old news', cautioning against 'over-interpreting it': Statistics Canada’s July advance estimate shows GDP essentially flat for the month; according to Bartlett’s calculations, existing and proposed tariffs—and retaliatory tariffs—could depress annualized growth in Q3 and Q4 from roughly 2% to near 1%, with retaliatory tariffs 'not only slowing real GDP and employment growth but also pushing up domestic inflation'. Fiscal policy, meanwhile, continues to ramp up. On September 2, Finance and National Revenue Minister François-Philippe Champagne announced an extension of the federal fuel excise tax suspension—10 cents per litre on gasoline and 4 cents per litre on diesel—originally set to expire on April 20, now extended through January 31, 2027; from February 1 to March 31, 2027, the tax will be levied at half the normal rate. The extension carries an estimated cost of C$2.9 billion, bringing total tax relief for fiscal year 2026–27 to C$5.3 billion. Retaliatory tariffs were announced on August 25 and take effect on September 8, applying three-tiered rates—15%, 25%, and 50%—to US imports valued at C$27.6 billion, matching US tariff levels item-by-item. The Department of Finance Canada described this as 'dollar for dollar, rate for rate', and paired it with C$7.5 billion in labour and business support, adding to nearly C$25 billion in prior tariff-related assistance. The Bank of Canada’s July report had already downgraded the contribution of government spending to 2026 growth—from 0.9 percentage points to 0.5—and attributed the unexpected weakness in Q1 primarily to falling government expenditure. Comparing these two official documents reveals that fiscal policy has emerged as a key variable across both directions in this cycle: the Bank of Canada blamed Q1’s softness on declining government spending, while Statistics Canada attributed Q2’s rise in disposable income to wages and government transfers. Reading these documents together yields not inference—but explicit judgments, each written independently by three institutions. The Bank of Canada states that retaliatory tariffs 'will raise costs for some businesses and may pass through to consumer prices over time'; Bartlett says they 'will also push up domestic inflation'; Holt directly questions the extension of the fuel tax suspension—calling it 'all the more puzzling' given the tight market for refined products, where refining margins remain under sustained pressure from Middle East conflict. According to the Department of Finance’s timeline, the tax relief expires on January 31, 2027, followed by two months at half-rate; at expiry, the gasoline component—which currently accounts for the entire 0.8-percentage-point gap between the overall CPI and the CPI excluding gasoline—will mechanically rebound. That timing falls squarely in Q1 2027, overlapping with Holt’s anticipated rate-hike window.

Exness: Latest survey indicates Canadians are growing increasingly concerned about inflation—does this signal a clear strengthening of the Canadian dollar?

The latest consumer expectations survey shows Canadian households’ inflation expectations for the next year have risen, with energy, food, and housing costs remaining top concerns. For the Bank of Canada, short-term price increases themselves are not the greatest risk; what is more worrisome is the prospect that persistently high inflation gradually reshapes consumers’ and firms’ expectations about future prices. When households anticipate ongoing price rises, wage demands and consumption behaviour may adjust accordingly, and firms become more likely to pass on costs to consumers—causing price pressures initially driven by energy or supply factors to spread further into the domestic economy. According to Eric, an analyst at Exness, the renewed uptick in inflation expectations means the Bank of Canada is unlikely to send any clearly dovish signals in the near term. Even if some price pressures stem from energy, as long as consumers begin to believe inflation will not quickly return to the 2% target, the Bank must maintain a restrictive monetary stance for longer to prevent inflation expectations from drifting further from target. This policy shift provides some support to the Canadian dollar, as markets may need to reassess earlier expectations of imminent policy easing. However, the Bank of Canada’s current environment is far from simple. Economic growth in Canada is losing momentum, the labour market has notably cooled, and high housing costs coupled with elevated borrowing rates continue to weigh on household consumption. This means that further rate hikes—while potentially helpful for curbing inflation—could also further weaken the housing market, consumer spending, and employment. Thus, the Bank’s future policy path will depend not only on the level of inflation, but also on whether current price pressures stem primarily from domestic demand—or mainly from external sources such as energy and other imported costs. If inflation is driven largely by strong demand and wage pressures, rate hikes can effectively dampen demand; but if price increases stem mainly from energy supply constraints and transportation costs, interest rate hikes have relatively limited impact. This explains why rising consumer inflation expectations—though strengthening the case for the Bank to hold a firm stance—do not yet confirm the start of a new hiking cycle. Oil prices add another layer of support for the Canadian dollar. As one of the world’s major energy exporters—unlike energy-importing economies such as Europe, Japan, and the UK—rising oil prices exert dual effects on Canada: they heighten domestic inflation pressure, making it harder for the Bank of Canada to pivot toward easing; yet they also boost energy export revenues and improve Canada’s terms of trade. Thus, higher oil prices currently influence the Canadian dollar through two channels: first, by increasing inflationary pressure and thereby reinforcing the case for continued monetary restraint; second, by improving Canada’s export earnings and providing direct support to the currency.

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The Bank of Canada is expected to hike rates to 2.5% amid inflation concerns driven by high oil prices. Policymakers cite energy shocks from the Middle East conflict as a key risk despite limited evidence of broader price transmission.

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