Why the Bank of Canada Needed to Stand Pat

To: Inflation Watchers

From: Jeremy M. Kronick and Steve Ambler

Date: September 11, 2026

Re: Why the Bank of Canada Needed to Stand Pat

The Bank of Canada held its policy rate constant at 2.25 percent last week, meeting market expectations. But if not for developments on the trade front, the economic data could well have pointed toward a hike. With the breakdown in Canada-US trade negotiations and the resulting economic uncertainty, the Bank had little choice but to hold.

To see how powerfully the trade story influenced that decision, consider the case for a hike had negotiations not broken down.

On August 28, Statistics Canada published its estimate of second-quarter gross-domestic-product growth. Growth came in above expectations: 3.3 percent on an annualized basis. That reversed the first-quarter weakness in GDP. Indeed, the first-quarter GDP growth numbers were revised up, turning a 0.1-percent annualized contraction into a 0.3-percent increase. For those who had asked whether Canada was in a recession following the fall in fourth-quarter 2025 GDP and the originally reported decline in the first quarter of 2026, the answer is now clearly no.

Second-quarter growth was boosted by surprisingly strong growth in business investment, up 9.5 percent at annualized rates. But growth wasn’t limited to business investment: Consumption rose 3.3 percent and exports 14.3 percent.

After easing from 3.2 percent in May to 2.6 percent in June, headline inflation increased to 3 percent in July, back at the upper end of the Bank of Canada’s 1-percent to 3-percent control range.

Yes, a big part of that 3-percent figure is due to energy prices – without energy, inflation was 2.2 percent. But crude oil prices have moved back up from under US$70 per barrel at the beginning of July to more than US$90, well above the US$75 per barrel projected in the Bank’s last Monetary Policy Report. And with no end in sight to the conflict in the Persian Gulf, that pressure could persist.

While we continue to see little evidence of this energy shock spreading to other sectors, the Bank will want to remain vigilant about that risk. This is especially the case as growth is widespread, with the C.D. Howe Institute’s diffusion index – which measures the breadth of growth across sectors – reaching its highest three-month average since May 2024.

Put all this data together, and there might have been a compelling case for the Bank to hike.

But despite rumours that an agreement was close, Canadian negotiators walked away from trade talks last month. In response, the United States immediately imposed 50-percent tariffs on a range of Canadian goods. Prime Minister Mark Carney then announced dollar-for-dollar retaliatory tariffs, which came into effect this week.

The ultimate impact on prices faced by Canadians is somewhat unclear. On the one hand, few US industries depend exclusively on Canadian buyers. With alternative export markets, US producers will not cut their prices, meaning the cost of the counter tariffs are passed through almost entirely to Canadian consumers and producers. On the other hand, in industries where Canadians can buy from alternative markets, American producers may have to cut prices to remain competitive.

Critically for an inflation-targeting central bank, the long-run effect (if these tariffs remain in place) will be on the level of prices. Inflation will increase in the short run, but then revert to its pre-tariff trend, although with prices on a higher path.

Regardless, the tariffs imposed by the United States, our counter tariffs and a continuing trade war will hurt affected Canadian industries and the economy writ large. Non-energy investment in Canada will take a hit as some Canadian firms contemplate holding off on investing until the Trump administration ends or, perhaps worse, moving their operations south of the border. Household spending is likely to suffer. Should the tariffs take effect and stay in place, some predictions point to job losses in the tens of thousands.

If that scenario comes to pass, it would push the Bank of Canada, all else equal, toward a rate cut to give a boost to the economy.

Ultimately, the Bank was faced with data suggestive of potential inflationary pressures, but massive trade uncertainty that threatens our market access to the world’s largest economy. We see no other choice for the Bank of Canada under these conflicting circumstances than to hold.

Jeremy Kronick is president and chief executive of the C.D. Howe Institute, where Steve Ambler, emeritus professor of economics at Université du Québec à Montréal, is the David Dodge Chair in Monetary Policy.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.

A version of this Memo first appeared in The Globe and Mail.