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

What did the decision say? On September 2, the Bank of Canada announced it would maintain its overnight rate target at 2.25%, with the bank rate at 2.50% and the deposit rate at 2.20%. This marks the seventh consecutive hold since the 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 projections outlined in the July Monetary Policy Report,” and thus the Governing Council agreed to hold rates steady. However, two notable shifts in wording appeared: 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, over time, be passed through to consumer prices.” 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 flexibility. Holt’s reference to “cracking the door open” rests on three sets of data. Statistics Canada reported on August 28 that real GDP grew 0.8% quarter-on-quarter in Q2, annualized at 3.3%—higher than the 2.5% projected in the Bank’s July Monetary Policy Report (MPR). Q1 growth was revised upward from 0.0% to 0.1%; according to Desjardins Group’s annualization calculation, this translates to a revision from −0.1% to +0.3%. The July CPI rose 3.0% year-on-year, with gasoline up 25.7%—but core CPI excluding gasoline remained at 2.2% for the third consecutive month. The Bank’s three core inflation 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 at the press conference that 3% “is too high”—and that “it’s highly concentrated in gasoline and oil prices”; while retaliatory tariffs “will increase costs,” their current inflationary impact is assessed as “fairly modest,” whereas the Middle East situation poses “the bigger problem.” The next decision is scheduled for October 28, alongside the release of a new Monetary Policy Report. First, the counterargument: the rebound is broad-based, and core inflation remains near target. Those not expecting a rate hike cite strong evidence. Detailed Statistics Canada data show the Q2 rebound was not isolated: exports rose 3.6%—the largest gain since Q1 2023—with passenger vehicles and light trucks exports surging 27.0%; residential investment rose 2.5% after two consecutive quarterly declines; business investment in engineering construction rose 2.3%, and computer equipment investment jumped 16.7%; nominal business revenue (not adjusted for price changes) rose 9.6%—the largest increase since Q1 2021—with Statistics Canada noting the energy sector as the largest contributor. Inventory changes subtracted 1.3 percentage points, implying final demand was stronger than the headline figure suggests.

[FXBTG Financial Sharing] Central bank officials are divided: Is the war-driven surge in energy prices pushing up interest rates?

According to a recent Financial Times report, central bank officials are divided over whether the war-induced rise in energy prices will push up interest rates. Typically, monetary policymakers tend to disregard the volatility of energy markets—but both the Bank of Canada and the Bank of England governors have indicated they must respond to the inflationary risks posed by rising oil and gas prices. This divergence is especially pronounced amid concerns that the conflict between Israel and Hamas could escalate, prompting central banks worldwide to reassess how to handle potential energy price shocks. Bank of Canada Governor Tiff Macklem told the Financial Times that, given persistently elevated inflation—reaching the highest level in a generation—the implications of rising energy prices have become harder to predict and control. He said: “When inflation has run above target for two years straight, when expected inflation also exceeds target, and when firms are rapidly passing on cost increases to consumers, we must proceed with greater caution. If transportation costs rise and fuel prices spill over into the prices of other goods and services, that would signal we need to do more.”

Bank of Canada Sees Sharply Higher Inflation Outlook as Oil Surges, Macklem Says

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The Bank of Canada expects to raise its quarterly inflation forecast significantly due to persistently high crude oil and petroleum product prices. Governor Tiff Macklem warned that monetary policy may need adjustment to ensure inflation returns to the 2% target amidst geopolitical tensions.

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