This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on September 2, 2026.
This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations.
Governing Council’s policy decision-making meetings began on August 25, 2026. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Nicolas Vincent, Michelle Alexopoulos and Marc-André Gosselin.
International economy
Governing Council members began their deliberations by discussing how the global economy was adapting to higher oil prices. The war in the Middle East continued, marked by intermittent flare-ups. With shipments through the Strait of Hormuz curtailed, energy prices remained elevated. Refinery margins were also unusually high owing to disruptions to both Middle Eastern and Russian refinery capacity. As a result, measures of headline inflation around the world were being pushed up, although spillovers from energy prices into the prices of other goods and services appeared limited thus far.
The US economy continued to grow strongly, driven by robust consumption and investment related to artificial intelligence (AI). The AI boom was supporting equity valuations, boosting the wealth and consumption of higher-income households. Inflation in the United States remained above target. While the inflationary impact of previously imposed tariffs had waned, higher gasoline and diesel prices were boosting inflation.
Growth in the euro area was stronger than expected in the second quarter, supported by exports and household spending. Inflation was slightly higher than in July. Prices for natural gas had risen further, giving an additional boost to headline inflation.
Despite ongoing strength in the technology sector, economic growth in China was weak in the second quarter due to lower export volumes and sluggish domestic demand.
Financial conditions had tightened since the July Monetary Policy Report. Long-term bond yields had moved up amid concerns about sovereign debt levels and expectations that central bank policy rates would need to increase to restrain inflation. Canadian bond yields also rose, albeit by less than yields in several other major advanced economies. Market expectations for oil prices had shifted up since July, while non-energy commodity prices remained flat. The Canadian dollar had appreciated slightly amid weakness in the US dollar.
Canadian economy and inflation outlook
Members discussed recent economic data and what the data meant for the outlook for growth and inflation. Data since the July Report had evolved largely in line with expectations.
As expected, gross domestic product growth rebounded in the second quarter following two quarters of weakness. The economy grew by 3.3% in the quarter, slightly above expectations. Members noted that growth was broadening, even after accounting for certain temporary factors that magnified the rebound. Consumer spending was strong and exports and business investment picked up. After an extended period of weakness, housing activity also experienced a rebound, despite continued softness in the condominium markets in Toronto and Vancouver.
Labour market developments also pointed to an improving economy. Data since July showed solid job growth, particularly in the private sector. But members agreed that the labour market was still soft, with the unemployment rate around 6½% and subdued wage growth. Taken as a whole, indicators pointed to an economy that was still in excess supply.
Members spent considerable time discussing what the new US tariffs and threats of further trade measures would mean for the sustainability of the recovery. New US tariffs had been imposed on roughly 5% of Canadian goods exports to the United States. Members acknowledged the significant impact these tariffs would have on the affected businesses and workers. The direct impact on the Canadian economy as a whole, however, would likely be modest. Fiscal measures could be expected to offset some of the impact of the new tariffs. However, the re-emergence of heightened trade uncertainty would weigh on consumer and business confidence. This could dampen household spending, business investment and hiring more broadly, particularly if the conflict escalated. Members agreed that the breakdown in trade negotiations, new tariffs and threats of further trade measures made growth prospects more uncertain.
Turning to inflation, members noted that consumer price index (CPI) inflation had been hovering around 3% for several months and was likely to remain elevated in the near term given the persistently high price of gasoline. The conflict in the Middle East continued with no signs of resolution. The lack of progress reopening the Strait of Hormuz had kept global oil prices high and raised market expectations for future oil prices. Also, refinery margins were expected to remain elevated for longer given damage to capacity and planned maintenance. Both factors were pushing up the prices of gasoline and diesel in Canada.
Members discussed how Canadian counter-tariffs on imports from the United States could affect inflation. Because most of the tariffs applied to intermediate inputs, such as steel, and to goods that had Canadian substitutes, the impact on inflation would likely be muted and spread out over time.
Members noted that while headline inflation had been near the top of the 1% to 3% band since April, CPI inflation excluding gasoline was 2.2% and core inflation remained around 2%. So far, there was little evidence that higher gasoline prices were passing through broadly to the prices of other goods and services.
Considerations for monetary policy
Governing Council members discussed what recent economic developments implied for the stance of monetary policy.
In the July Report, the base-case projection assumed that existing US tariffs on Canadian exports would not be removed, that the Canada‑United States‑Mexico Agreement would remain in place and be subject to annual reviews, and that shipping through the Strait of Hormuz would gradually return to normal, lowering the price of oil. The Report also stressed that US trade policy and the war in the Middle East remained the two most important risks to the outlook. Since then, economic data showed that the economy and inflation had evolved broadly in line with the July forecast, but the main risks had become more acute.
Regarding the trade conflict, economic activity was solid ahead of the latest round of tariffs. Growth recovered in the second quarter, and the sources of economic activity had broadened. Members discussed their assessment of the degree of slack in the economy. While there was a diversity of views on the magnitude of slack given recent data, Governing Council judged that the economy was still in excess supply. The new tariffs were going to have a significant impact on certain sectors. While the government’s fiscal response and businesses’ ongoing efforts to adapt to tariffs and trade uncertainty should help mitigate some of the impact, members agreed that the latest developments made the sustainability of the recovery more uncertain.
With respect to the war in the Middle East, members were concerned that the protracted conflict and damage to refinery capacity would keep gasoline and diesel prices high, leaving headline inflation higher for longer than anticipated in the July Report. While there was little evidence thus far that high gasoline prices were passing through to other goods and services, members agreed that the longer they were high, the more likely they would be passed through. This increased the upside risks to inflation.
Governing Council members exchanged views on how to weigh these risks.
Members agreed that the risks to inflation from persistently high energy prices had increased. There were no indications that the war in the Middle East was nearing a resolution or that elevated refinery margins were normalizing. This meant higher inflation for longer, which could lead to more generalized inflation. In addition, trade actions on both sides of the border would add to business costs, which could be passed on to consumer prices over time.
So far, Governing Council had been looking through the initial direct impact of gasoline prices on inflation. Members acknowledged that there was some uncertainty about the likelihood and magnitude of higher energy prices spilling over into the prices of other components of the CPI, given current economic conditions.
Members shared a range of views on how new US tariffs would affect growth and whether the resulting weakness in the economy would contain the pass-through of higher energy prices. The new US tariffs have likely had a negative effect on business and consumer confidence and could dampen economic activity. But uncertainty about trade was elevated, both in terms of how US trade policy would evolve and the impact trade measures would have on the Canadian economy.
With the economy still in excess supply and the labour market soft, weaker growth from the trade conflict could keep inflationary pressures contained. However, 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.
Members noted that several outcomes for trade and the conflict in the Middle East were possible, which could shift the balance of risks. They would need to watch carefully to see whether the economic recovery will be sustained in the face of an escalation of US tariffs and whether energy inflation passes through to other goods and services.
Policy decision
With the economy and inflation evolving broadly as forecast in the July Report, Governing Council decided to leave the policy interest rate unchanged at 2.25%.
The Canadian economy had been on a more solid footing when trade negotiations with the United States broke down. However, uncertainty had increased and could affect the durability of the recovery. Inflation risks had also increased. With inflation having been above the 2% target for several months and likely to remain above the target in the near term, members agreed that the risk that inflation spreads to other goods and services had risen.
Governing Council agreed to make it clear in its communications that monetary policy would ensure that Canadians can continue to count on price stability through this period of upheaval. 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. Any weakness in growth will be factored into the forecast for inflation, as will the impact of developments in energy prices.