Bank of Canada September meeting recap: holding steady amid trade headwinds

As widely expected, the Bank of Canada held the overnight rate at 2.25% for a seventh consecutive meeting in September, despite a widening of risks on both sides of the central bank’s inflation mandate from an escalation in US tariffs and persistently higher energy prices. The central bank (unsurprisingly) views further indications of a broadening economic recovery in backward looking economic data since the last policy decision as good news, with GDP growth bouncing back in Q2 and the unemployment rate drifting lower into July. The policy statement did note some tightening in broader financial conditions from higher bond yields since the last policy decision. But the performance of economic indicators over the last month and a half argues that the level of interest rates currently is supportive enough to, all else equal, allow the economy to continue to recover and unemployment to drift lower from levels that are still relatively elevated. Our own base-case remains that the BoC will leave the overnight rate where it is through 2026. We assume gradual interest rate hikes in 2027 but conditional on the Canadian economic backdrop continuing to improve.

Still the BoC also addressed the clear escalation of risks on both sides of their inflation mandate since July with new U.S. tariffs on about 5% of Canadian exports adding to downside economic growth risks, but higher energy prices pushing up global energy inflation, including in Canada. This is essentially a return to the two-sided interest rate risks highlighted in policy decisions from April to June following a brief reprieve at the last meeting in July when risks around the BoC policy rate were broadly judged to have narrowed.

Governor Macklem’s opening statement was also clear that “monetary policy cannot offset the effects of tariffs or influence global energy prices.” Fiscal policy is objectively a more effective policy tool to address targeted economic impacts from tariffs than blanket BoC interest rate changes, and Governor Macklem also argued that federal support programs will “likely mitigate some of the harm” In terms of global energy prices, there is nothing that the BoC can do to impact the global price of oil.

Still, in both cases, there would be room for the BoC to respond were those shocks to spread across additional sectors/products to impact broader inflation trends. On the trade front, increased trade uncertainty could weigh broadly on consumer and business spending in a way that would increase slack in the economy and cause underlying inflationary pressures to ease (arguing for lower interest rates for longer). On the global energy price front, higher energy costs could spread to increase costs for a wider array of consumer goods and services, and those risks grow the longer energy prices remain elevated (and potentially arguing for higher interest rates.)

Like (it appears) the Bank of Canada, neither of those risks have changed our own base-case economic outlook. There has been limited spillover of higher energy prices to-date into the prices of other consumer goods and services. And Canadian consumers and businesses have shown signs of adapting to life under increased trade uncertainty — business investment strengthened in Q2 and consumer spending has remained resilient. We remain cautiously optimistic that the Canadian economy will continue to gradually improve and the unemployment rate will drift gradually lower. Contingent on that improving economic outlook being realized, we expect the BoC will be in a position to gradually raise interest rates from currently low levels beginning in 2027. But the BoC is clearly still highly data dependent and the evolution of interest rates will depend on the path of domestic Canadian growth and inflation data. Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States. This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. The reader is solely liable for any use of the information contained in this document and Royal Bank of Canada (“RBC”) nor any of its affiliates nor any of their respective directors, officers, employees or agents shall be held responsible for any direct or indirect damages arising from the use of this document by the reader. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates. This document may contain forward-looking statements within the meaning of certain securities laws, which are subject to RBC’s caution regarding forward-looking statements. ESG (including climate) metrics, data and other information contained on this website are or may be based on assumptions, estimates and judgements. For cautionary statements relating to the information on this website, refer to the “Caution regarding forward-looking statements” and the “Important notice regarding this document” sections in our latest climate report or sustainability report, available at: https://www.rbc.com/community-social-impact/reporting-performance/index.html. Except as required by law, none of RBC nor any of its affiliates undertake to update any information in this document.