BoC Turns Hawkish As Higher Oil Prices Lift Inflation Risks
Trade tensions could hamper firms and hold back economy (Image: HarryDaniels)
- Bank sees broadening economic recovery - Risks from US tariffs and trade uncertainty - Energy prices elevate inflation risks - Monetary policy on hold with focus on stability - December hike back in play
The prospect of higher Canadian interest rates appears to be moving more clearly into view following the Bank of Canada’s latest monetary policy decision. Even so, analysts remain unconvinced that a hike will materialise before year-end.
As widely expected, the Governing Council voted on Wednesday to keep the policy rate unchanged at 2.25%.
The accompanying statement struck a distinctly more hawkish tone and appeared to open the door to a rate hike before the end of the year. The Bank said that with the economy and inflation evolving broadly in line with the July MPR, policymakers had agreed to leave rates unchanged.
“However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain,” it added.
Analysts also highlighted a subtle but potentially important change in guidance. The Bank dropped its previous assertion that the current policy rate “remains appropriate”, replacing it with a pledge that it was “prepared to adjust monetary policy as needed.”
Stephen Brown, chief North America economist at Capital Economics, cautioned against reading too much into the shift. “We would not take this as a signal of an imminent rate increase, but we will probably need to pull forward our forecast for the first hike, currently pencilled in for the second quarter of 2027,” he said.
Inflation Risks Move Higher
The Bank is having to balance renewed trade tensions with the US against the prospect of persistently higher oil prices following the US-led military campaign against Iran in the Gulf.
Governor Tiff Macklem, speaking to reporters after the decision, said recent data had largely evolved in line with the Bank’s July forecasts and highlighted three main messages.
First, economic growth had picked up, putting Canada on “a stronger footing” as it faced renewed external challenges.
Second, the conflict in the Middle East was expected to keep energy prices “higher for longer”, increasing the upside risks to the inflation outlook. Finally, Macklem reiterated the Bank’s commitment to keeping inflation close to its 2% target over time.
“We will be a source of stability as Canadians navigate shifting global developments,” he said.
Growth Remains Uneven
Despite Macklem’s tougher tone on inflation, economic activity has remained uneven over the course of 2026, while renewed trade tensions threaten to create fresh headwinds for Canadian businesses.
TD Securities noted that although the Bank appeared to downplay the direct impact of tariffs in its statement, it continued to see excess supply in the economy as providing a “longer runway for hikes”.
The bank therefore expects the BoC to remain on hold through year-end.
December Hike Back in Play
Capital Economics’ Brown was somewhat less certain. “Given it looks increasingly likely that oil prices will remain near current levels over the rest of the year rather than fall back as we originally assumed, an interest rate hike at the final meeting of the year, in December, is arguably now looking more likely,” he said.
For now, the message from policymakers appears to be that rates can remain unchanged while the Bank assesses the competing effects of stronger domestic activity, higher energy prices and renewed trade uncertainty. But compared with July, the risks have clearly shifted in a more hawkish direction.
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- Bank sees broadening economic recovery
- Risks from US tariffs and trade uncertainty
- Energy prices elevate inflation risks
- Monetary policy on hold with focus on stability
- December hike back in play
By Harry Daniels
LiveSquawk News
@HarryDaniels71
19:00 GMT | 2 September 2026
The prospect of higher Canadian interest rates appears to be moving more clearly into view following the Bank of Canada’s latest monetary policy decision. Even so, analysts remain unconvinced that a hike will materialise before year-end.
As widely expected, the Governing Council voted on Wednesday to keep the policy rate unchanged at 2.25%.
The accompanying statement struck a distinctly more hawkish tone and appeared to open the door to a rate hike before the end of the year. The Bank said that with the economy and inflation evolving broadly in line with the July MPR, policymakers had agreed to leave rates unchanged.
“However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain,” it added.
Analysts also highlighted a subtle but potentially important change in guidance. The Bank dropped its previous assertion that the current policy rate “remains appropriate”, replacing it with a pledge that it was “prepared to adjust monetary policy as needed.”
Stephen Brown, chief North America economist at Capital Economics, cautioned against reading too much into the shift. “We would not take this as a signal of an imminent rate increase, but we will probably need to pull forward our forecast for the first hike, currently pencilled in for the second quarter of 2027,” he said.
The Bank is having to balance renewed trade tensions with the US against the prospect of persistently higher oil prices following the US-led military campaign against Iran in the Gulf.
Governor Tiff Macklem, speaking to reporters after the decision, said recent data had largely evolved in line with the Bank’s July forecasts and highlighted three main messages.
First, economic growth had picked up, putting Canada on “a stronger footing” as it faced renewed external challenges.
Second, the conflict in the Middle East was expected to keep energy prices “higher for longer”, increasing the upside risks to the inflation outlook.
Finally, Macklem reiterated the Bank’s commitment to keeping inflation close to its 2% target over time.
“We will be a source of stability as Canadians navigate shifting global developments,” he said.
Despite Macklem’s tougher tone on inflation, economic activity has remained uneven over the course of 2026, while renewed trade tensions threaten to create fresh headwinds for Canadian businesses.
TD Securities noted that although the Bank appeared to downplay the direct impact of tariffs in its statement, it continued to see excess supply in the economy as providing a “longer runway for hikes”.
The bank therefore expects the BoC to remain on hold through year-end.
Capital Economics’ Brown was somewhat less certain. “Given it looks increasingly likely that oil prices will remain near current levels over the rest of the year rather than fall back as we originally assumed, an interest rate hike at the final meeting of the year, in December, is arguably now looking more likely,” he said.
For now, the message from policymakers appears to be that rates can remain unchanged while the Bank assesses the competing effects of stronger domestic activity, higher energy prices and renewed trade uncertainty. But compared with July, the risks have clearly shifted in a more hawkish direction.