MediumIV Macro Policy & Sovereign Debt2 September 2026, Wednesday
Bank of Canada holds its policy rate at 2.25% for a seventh consecutive time, citing Middle East-driven energy prices and US tariffs
The economy grew at an annualised 3.3% in the second quarter, while headline inflation is running at around 3%. The BoC stressed that uncertainty is high; the next decision will be announced on 28 October.
On 2 September 2026 the Bank of Canada left its overnight rate target at 2.25%, the bank rate at 2.5% and the deposit rate at 2.20%. According to TD's assessment, this is the seventh consecutive hold. The bank noted that after a weak first quarter, GDP grew by 3.3% in the second quarter and that the recovery had spread to consumption and housing activity. Headline inflation is around 3%, inflation excluding gasoline 2.2% and core inflation around 2%. The unemployment rate fell to 6.4% in July. The bank said it saw little evidence so far that high oil prices were spilling over into other items, but that upside risks had increased. The summary of deliberations on the decision was published on 16 September.
The decision shows Canada caught between two external shocks. On one side are the energy prices and long-term yields pushed up by the war in the Middle East; on the other, the reciprocal tariffs that followed the collapse of trade talks with the US. According to TD economist Marc Ercolao, stronger-than-expected second-quarter growth has weakened the case for further rate cuts. As an energy exporter, Canada earns revenue from high oil prices, but tariffs are weighing on manufacturing and export volumes. For markets, the BoC remaining cautious until 28 October leaves the Canadian dollar and the yield curve largely dependent on the tariff news flow.
Talay assessment
Bottom line
The seventh consecutive hold shows the Bank of Canada choosing to wait between strong second-quarter growth and energy-driven inflation risk. Core inflation near 2% weakens the case for a hike, while 3.3% growth weakens the case for a cut. Another hold on 28 October is the most likely outcome; the direction will depend on tariff headlines and whether high oil prices spill over into other components.
Likely effects
- Canadian borrowing conditionsUncertain1–6 months
An unchanged policy rate preserves conditions supporting the recovery in consumption and housing, but war-driven increases in extended-maturity yields keep financing costs elevated for households and firms.
- Canadian dollar and yield curveNegativeWeeks
With no clear rate direction, the Canadian dollar and the yield curve remain highly sensitive to US tariff news and oil prices, raising the risk of near-term volatility.
Possibilities, ranked
- 1Another hold on 28 October75%
The growth–inflation balance stays unchanged and the Bank leaves the rate at 2.25% while stressing uncertainty.
Watch: Inflation excluding gasoline staying around 2.2%; the cautious tone of the summary of deliberations published on 16 September.
- 2Rate cut15%
Tariffs visibly damage manufacturing and employment, pushing the Bank to cut in support of growth.
Watch: Unemployment rising markedly from 6.4% and a sharp slowdown in third-quarter growth.
- 3Rate hike10%
High oil prices spill over into other components and inflation expectations deteriorate, putting tightening on the table.
Watch: Core inflation moving clearly above 2% and headline inflation settling above 3%.
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.