Bank of Canada signals rate hike threat amid oil price pressure

The Bank of Canada held its benchmark interest rate at 2.25% on Sept. 2 for the seventh consecutive time, but governing council minutes released Wednesday make clear that policymakers are increasingly alert to upside risks that could force a rate increase before year's end.

The Governing Council, led by Governor Tiff Macklem and including Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Nicolas Vincent, Michelle Alexopoulos, and Marc-André Gosselin, concluded that inflation risks had intensified since the July 2026 Monetary Policy Report.

In language that will concern mortgage brokers monitoring the rate outlook, the minutes stated that since July, "economic data showed that the economy and inflation had evolved" as expected "but the main risks had become more acute."

Canada's economy expanded at an annualized rate of 3.3% in the second quarter, slightly above expectations and a meaningful rebound from two consecutive quarters of weakness.

Consumer spending strengthened, exports picked up, and the housing market posted a modest recovery, though condominium markets in Toronto and Vancouver remained soft.

The unemployment rate stood at approximately 6.5%, with the council describing the labour market as still soft despite solid private-sector job creation.

Energy prices and the spillover question

The central question at the Sept. 2 deliberations was whether prolonged high gasoline prices, driven by the ongoing disruption to oil tanker traffic through the Strait of Hormuz and damage to Middle Eastern and Russian refinery capacity, would begin passing through to broader consumer prices.

Canada's Consumer Price Index (CPI) held at 3% year over year in August, Statistics Canada reported, having peaked at 3.2% in May. Core inflation and CPI excluding gasoline both remained near 2%, offering policymakers some room.

The minutes were explicit on the conditions that would prompt action: "If higher energy prices did spill over into other components of the CPI, members agreed that it could require a monetary policy response to prevent broad-based inflation from setting in."

The council also acknowledged it had been "looking through" the direct impact of gasoline prices on inflation, but warned that the longer energy costs stayed elevated, the greater the risk of a broader pass-through.

Drew Donaldson, Mortgage Broker and Principal at Donaldson Capital, says higher bond yields are creating pressure on mortgage rates, but he still expects a strong finish to the year for the housing market.https://t.co/q5VXAziOZB

— Canadian Mortgage Professional Magazine (@CMPmagazine) September 17, 2026

Trade conflict complicates the path forward

Policymakers also spent considerable time examining the implications of new US tariffs, which cover roughly 5% of Canadian goods exports to the United States.

The breakdown in Canada-US trade negotiations — which culminated when Prime Minister Mark Carney recalled Canadian negotiators in late August after American officials introduced last-minute demands he said threatened Canada's economy and sovereignty — compounded the uncertainty heading into the decision.

The question of whether Trump tariff chaos signals BoC rate moves ahead remained central to the Governing Council's calculus. Members assessed the direct drag on the broader economy as likely modest and expected fiscal measures to offset part of the impact.

The greater concern was a renewed chill on consumer and business confidence that could dampen hiring, investment, and household spending, particularly if trade tensions escalated.

The minutes cautioned that "the breakdown in trade negotiations, new tariffs and threats of further trade measures made growth prospects more uncertain."

Douglas Porter, chief economist at BMO Capital Markets in Toronto, previously captured the bind, saying, "After energy prices settle down, the focus is going to turn entirely to where the USMCA is headed. And frankly, I'm a bit concerned on that front — I am concerned trade is going to continue to be a drag on the Canadian economy."

The Bank of Canada's next interest rate decision is scheduled for October 28, when the central bank will also publish its quarterly Monetary Policy Report.

With rates steady but economists watching for a different move, the Governing Council's formal statement left little ambiguity about its guiding framework: "While supply shocks can present a tension between addressing economic weakness and rising inflation, members agreed to reiterate that the stance of monetary policy will be guided by the Bank's inflation forecast and the risks around it."

At his news conference following the Sept. 2 decision, Macklem was direct: "The data we've received since our last decision was broadly in line with our forecasts. But as I've just outlined, the risks are shifting and we are prepared to adjust monetary policy as needed."

Leslie Preston, managing director and senior economist at TD Economics in Toronto, said the August CPI release did not justify the tightening already priced into markets.

"We don't think today's inflation report supports this degree of tightening," Preston said, adding that core inflation was rising "but off a very low level, and is expected to remain within the BoC's comfort zone" — particularly as US tariffs continue to weigh on Canadian growth. 

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