Central bank's October call hinges on whether energy inflation spreads beyond fuel prices
The Bank of Canada is navigating a difficult crossroads ahead of its October 28 rate decision, with Governor Tiff Macklem warning that higher borrowing costs remain a live possibility.
In a speech in Halifax, Nova Scotia, Macklem laid out the competing forces facing policymakers. Energy prices tied to the Middle East conflict have kept Canada's headline inflation above the Bank's 1%–3% target range for three consecutive months, while new US tariffs threaten to suppress growth and erode confidence.
A fresh quarterly forecast, released alongside the October 28 decision, will help tip the scales.
Royce Mendes, head of macro strategy at Desjardins Group in Toronto, said the Bank appears to be laying groundwork for a rate increase should energy prices hold — "but that's far from a foregone conclusion."
Canada's consumer price index (CPI) held at 3% year-over-year in August, matching July and sitting above target for a third straight month.
Gasoline prices were 23% higher than a year earlier. The Bank's preferred core measures held near 2%, suggesting broader price pressures have yet to take hold.
Read more: BoC's Macklem: Economic growth could halve in Q4 as US tariffs bite
When acting too late costs more
Macklem was candid about the risks of delay.
"Two things probably have to happen if you're too slow: One is, you're going to have to raise rates very quickly," he said.
"And secondly, you're probably going to end up having to raise them more than if you moved earlier because things will have gotten more out of hand."
The two-year Government of Canada bond yield rose more than 40 basis points over the past month as fixed-income traders priced in rate increases.
Douglas Porter, chief economist at BMO Capital Markets in Toronto, acknowledged that the inflation threat had "rekindled chatter of a potential rate hike in 2026," while maintaining that a weak economy and unresolved United States–Mexico–Canada Agreement (USMCA) uncertainty made an increase "a very long shot indeed."
The latest Bank of Canada minutes show growing concern about energy prices, inflation risks, and trade uncertainty. Tiff Macklem of the Bank of Canada and Leslie Preston of TD Economics weigh in on the outlook.https://t.co/7EBVbT9OBI
— Canadian Mortgage Professional Magazine (@CMPmagazine) September 18, 2026
Trade drag complicates the picture
The new US tariffs in place cover roughly 5% of Canadian goods exports. If they hold, the Bank estimates fourth-quarter growth could slow to below 1% annualized.
Abbey Xu, economist at Royal Bank of Canada (RBC) in Toronto, said Canada's August CPI report and what it signals for the mortgage market showed underlying pressures "remained comparatively contained," but warned risks were "increasingly tilted toward an earlier hike, particularly if elevated energy prices persist while the economy and labour market continue to recover."
Read more: Bank of Canada should hold fire while Fed moves — CIBC
Leslie Preston, managing director and senior economist at TD Economics in Toronto, said bond market moves had outpaced the data.
"We don't think today's inflation report supports this degree of tightening," she said. Andrew Grantham of CIBC Economics in Toronto agreed, saying the Bank was likely to hold while tariff uncertainty and trade tensions continue to weigh on Canada's economic path, given that core inflation remained muted.
Macklem was unambiguous: "We are going to make our best judgment and decide what we think is the best thing to do to bring inflation back to target."
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