Monetary Policy Report—October 2025—Canadian economy
Many countries have signed new trade agreements with the United States. US tariffs continue to be in flux, and the future of trade in North America remains uncertain.
Trade negotiations between Canada and the United States, including the review of the Canada-United States-Mexico Agreement (CUSMA), remain uncertain. The projection is based on tariffs in place or officially agreed on by October 22, 2025 (Chart 18).
The average level of tariffs between the United States and Canada has increased significantly since the beginning of 2025 but only slightly since the July Report (Table 1).
| Before 2025 | July* | October | |
|---|---|---|---|
| US tariff rate on Canada | 0.1 | 4.4 (4.8) | 5.9 |
| Canadian tariff rate on the United States† | 0.0 | 2.6 (2.1) | 1.0 |
* Numbers in parentheses are the average tariff rates published in the July Report. The assumptions have been revised based on new data and methods.
† These tariff rates include the impact of Canadian tariff remissions.
How the average tariff rates are calculated
Average tariff rates are calculated by weighting each recently announced tariff for a given product by that product’s share of exports in 2024. This includes only import tariffs, which is a general tax a government imposes on goods entering a country. Countervailing or anti-dumping duties, such as US duties on Canadian softwood lumber, are excluded.1 Consequently, the average tariff rate understates the true cost to the Canadian economy of the recent trade measures imposed by the United States.
Exemptions under CUSMA and other qualifying factors affect the average tariff rate.2 According to the US Census Bureau, 90% of the value of Canadian goods exported to the United States entered that country tariff-free in July 2025. If steel, aluminum, motor vehicles and energy are excluded, then 94% of the value of goods entered the United States tariff-free.
Average tariff rates are based on assumptions made using limited data because many important details—such as the proportion of motor vehicle exports with non-US content—cannot readily be computed. These assumptions are routinely updated to ensure accuracy when new information becomes available.
Canada’s average tariff rate on goods imported from the United States includes an estimate for the effect of tariff remissions, as announced by the Government of Canada. These remissions return tariff revenues to affected businesses, which are assumed to remove any impact of tariffs on product prices. This effectively reduces the amount of US imports that are subject to tariffs. If remissions were not taken into account, Canada’s average tariff rate on US imports would be estimated to be 2.4% instead of 1.0% in the October Report.
The detailed tariff assumptions in the projection
This outlook assumes that the following tariffs remain in place (Table 2).
| US tariffs on Canada | Tariffs in place before the July Report:
Tariffs added since the July Report:
|
|---|---|
| Retaliation by Canada |
|
| US tariffs on other regions | Increase in total tariff rate compared with the start of 2025:
|
| Chinese tariffs on Canada and the United States |
|
* This tariff rate does not include countervailing or anti-dumping duties that stem from Canada’s long-standing disagreement with the United States over softwood lumber.
† Numbers in parentheses are assumptions from the July Report.
Note: pps is percentage points. Tariff rate calculations are rounded to the nearest half percent.
Other key inputs to the projection
The Bank of Canada’s projection is conditional on several other key inputs and assumptions about their future path. The Bank regularly reviews these assumptions and adjusts the economic projection accordingly.
- Tariffs and trade tensions reduce total factor productivity and investment, resulting in Canada’s potential output being 0.8% lower in 2026 than expected in January.
- Global potential output in 2026 is 0.2% lower due to trade tensions.
- The impact of policy uncertainty is assumed to slowly decrease around the world in 2026.
- In Canada, some tariff revenues are remitted back to affected businesses. All remaining revenues are redistributed to households.
- In all other countries, half of the revenues from tariffs are redistributed to households, while the rest are added to general government revenues.
- In most countries, three-quarters of the increased costs from tariffs are passed through to consumer prices within six quarters.
- In the United States, tariffs are assumed to be passed through to goods prices in roughly three quarters. The United States is the only country to impose tariffs on all its trading partners, increasing the cost of imports from all countries. This means businesses do not need to worry about cheaper substitutes and can therefore pass on tariff-related cost increases more quickly.
- The projection incorporates information from published provincial budgets and new federal fiscal measures that have been tabled at the time of writing.
- The rate of population growth of people aged 15 and over in Canada is assumed to slow from 3.3% in 2024 to 1.5% in 2025. It then slows further to an average of 0.5% in 2026 and 2027.
- The population of Canada by the end of 2026 is roughly in line with the outlook in the January Report.
- Potential output growth in Canada is expected to slow from 1.6% in 2025 to 1.0% in 2026. It then rises to 1.3% in 2027.
- Annual revisions to potential output growth were published in the April Report. Given the uncertainty around US trade policy at that time, two scenarios were presented, each with different implications for potential output. The outlook for potential output has evolved closer to the first scenario, which featured limited tariffs and high uncertainty. The base-case projection for October builds on this profile and incorporates the rise in US tariffs, historical revisions and recent data.
- The nominal neutral interest rate in Canada is assumed to be in the estimated range of 2.25% to 3.25%.
- Over the projection horizon, the per-barrel prices for oil are assumed to be US$65 for Brent and US$60 for West Texas Intermediate. These are $15 lower than assumed in the January Report. Western Canadian Select is assumed to be US$50, which is $10 lower than the assumption in January.
- The Canadian dollar is assumed to average 72 cents US over the projection, 2 cents higher than in the January Report.
Endnotes
- 1. Although these specific duties are excluded from the average tariff rate calculations in this Report, the estimated economic impact resulting from changes to these duties is incorporated into the economic outlook.[←]
- 2. Other qualifying factors include product-specific exemptions, goods imported by a US government agency, re-exports, repairs or temporary imports.[←]