The Bank of Canada held rates steady for the seventh time—but cracked the door open to hiking.

What did the decision say? On September 2, the Bank of Canada announced it would hold its overnight rate target steady at 2.25%, with the bank rate at 2.50% and the deposit rate at 2.20%. This marks the seventh consecutive hold since its last cut on October 29, 2025 (effective the following day). The statement noted that the economy and inflation are “broadly evolving in line with the July Monetary Policy Report (MPR) projections,” and thus the Governing Council agreed to maintain the current policy rate. However, two key wording changes signal a subtle shift: first, due to the ongoing Middle East conflict and limited progress toward reopening the Strait of Hormuz, “upside risks to the inflation outlook have increased”; second, new U.S. tariffs—and Canada’s retaliatory tariffs—“will raise costs for some businesses and could pass through to consumer prices over time.” Derek Holt, economist at Scotiabank, pointed out that the phrase “the current policy interest rate remains appropriate,” present in the July statement, has now been removed—indicating the Bank has “clearly cracked the door open.” Should incoming data support such a move, tightening as early as the next meeting is now within the realm of possibility. Holt’s “cracking the door open” rests on three data points. Statistics Canada reported on August 28 that real GDP grew 0.8% quarter-on-quarter (q/q) in Q2, annualized at 3.3%—above the Bank’s July MPR forecast of 2.5%. Q1 growth was revised up from 0.0% to 0.1%, equivalent—per Desjardins’ annualization—to an upward revision from −0.1% to +0.3%. The July CPI rose 3.0% year-on-year (y/y), driven largely by gasoline prices (+25.7% y/y); excluding gasoline, core inflation remained at 2.2% for the third consecutive month. The Bank’s three core measures stood at: CPI-trim (trimmed mean) at 1.9%, CPI-median at 2.0%, and CPI-common at 2.7%. The unemployment rate fell to 6.4% in July. According to CBC, Governor Tiff Macklem stated in his press conference that 3% is “too high”—and “highly concentrated in gasoline and oil prices”; while retaliatory tariffs “will increase costs,” their current inflationary impact is assessed as “fairly modest,” with the Middle East posing the “larger concern.” The next decision is scheduled for October 28, alongside the release of a new Monetary Policy Report. The counterargument: the rebound is broad-based; core inflation remains near target Evidence supporting no hike remains strong. Statistics Canada’s detailed breakdown shows the Q2 rebound was not isolated: exports surged 3.6%—the largest gain since Q1 2023—with passenger vehicles and light trucks exports jumping 27.0%; residential investment rose 2.5% after two consecutive quarterly declines; among business investment, engineering construction investment grew 2.3% and computer equipment investment soared 16.7%; nominal business revenue (not adjusted for price changes) rose 9.6%—the strongest since Q1 2021—with Statistics Canada noting energy-sector activity as the largest contributor. Inventory accumulation subtracted 1.3 percentage points, implying underlying final demand was even stronger than headline GDP suggests.

Exness: Latest survey shows Canadians growing increasingly concerned about inflation—will the Canadian dollar strengthen noticeably?

The latest consumer expectations survey reveals that Canadian households’ one-year inflation expectations 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; rather, what warrants greater vigilance is the potential for persistently high inflation to reshape consumers’ and businesses’ expectations about future prices. When households anticipate sustained price rises, wage demands and consumption behavior may adjust accordingly—and firms become more likely to pass on cost increases to consumers, causing price pressures initially driven by energy or supply factors to spill over into the domestic economy. According to Eric, analyst at Exness, the renewed uptick in inflation expectations means the Bank of Canada will find it difficult to send a clearly dovish signal in the near term. Even if part of the price pressure stems from energy, as long as consumers begin to believe inflation will not quickly return to 2%, the Bank must sustain a restrictive monetary stance for longer to prevent inflation expectations from drifting further from target. Such a policy shift provides some support to the Canadian dollar, as markets may need to reassess earlier assumptions about imminent policy easing. That said, the Bank’s current environment is far from simple. Canada’s economic growth is losing some momentum, the labor market has notably cooled compared with earlier periods, and persistently high housing costs coupled with elevated borrowing rates continue to weigh on household consumption. This implies that further rate hikes—while potentially helpful for curbing inflation—could also further weaken the housing market, consumer spending, and employment. Therefore, the Bank’s future policy path will hinge not only on the level of inflation but also on whether current price pressures stem primarily from domestic demand—or instead reflect external factors like energy and transportation costs. If inflation is mainly driven by robust demand and wage pressures, higher rates can effectively dampen demand; but if price increases stem chiefly from energy supply constraints and transport costs, interest-rate hikes offer relatively limited traction. This explains why rising consumer inflation expectations—though strengthening the case for the Bank to maintain a hawkish posture—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, Canada differs from energy-importing economies like Europe, Japan, and the UK: rising oil prices not only intensify domestic inflationary pressures but also boost energy export revenues and improve Canada’s terms of trade. Thus, higher oil prices currently affect the Canadian dollar through two channels: first, they heighten inflationary pressures, making it harder for the Bank of Canada to pivot toward easing; second, they improve Canada’s export earnings, directly supporting the currency.

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Bank of Canada Governor Tiff Macklem indicated that rising oil prices are supporting economic growth while driving up inflation expectations. Policymakers warn of potential interest rate hikes if energy costs remain elevated.

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