Monetary Policy Report—January 2026
With geopolitical uncertainty elevated and Canada’s trade agreement with the United States and Mexico under review, risks around the outlook are unusually high.
Predicting how geopolitical events will unfold and how they will affect the global and Canadian economies is difficult. If tensions escalate and events disrupt global supply chains and commodity markets, goods inflation could rise more than expected. Geopolitical events could also slow economic activity. For example, financial markets could demand higher risk premiums, which would raise borrowing costs and weaken confidence. This would slow the growth of gross domestic product (GDP) and reduce inflationary pressure.
The other major source of uncertainty is the review of the Canada-United States-Mexico Agreement (CUSMA). The base-case projection assumes that the tariffs and trade policies in place on January 23, 2026, persist over the projection horizon (see the Tariff and other assumptions section). It also assumes that the 2026 CUSMA review preserves the existing trade deal, reducing uncertainty for exporters and around integrated North American supply chains.
However, the review could lead to a wide range of other outcomes (see In Focus: The review of the Canada-United States-Mexico Agreement). CUSMA could be extended but only after significant renegotiation. Another possibility is that no extension is reached, resulting in ongoing annual reviews. A more adverse scenario would be member countries withdrawing from the agreement entirely. Overall, the CUSMA review is assessed as a downside risk for economic growth, but inflation could be higher or lower.
The inflation outlook also faces other risks. These are considered below.
Main upside risks to inflation
There is less excess supply
Revisions by Statistics Canada indicate that the economy entered 2025 much stronger than previously thought. Nearly all the revision to GDP has been attributed to higher potential output. There is a risk that more of this upward revision could be due to demand rather than potential output. If so, downward inflationary pressures would be weaker than projected.
Restructuring is more costly
The economy is adjusting to the impact of US tariffs. Businesses are seeking new markets and diversifying their supply chains. Capital and labour are expected to move to other sectors of the economy over the projection horizon.
The cost of this adjustment is difficult to assess. If the reorientation of production and supply chains turns out to be more costly or takes longer than assumed, elevated business costs could add more to inflationary pressures.
Main downside risks to inflation
Existing tariffs could weaken the economy further
Tariffs imposed by the United States have led to a sharp decline in exports in affected industries. To date, however, the related declines in production and employment—and the spillovers to other parts of the economy—have been more muted than anticipated. If production and employment were to decline more sharply, spillovers to the broader economy would intensify. This would lead to increased excess supply and additional downward pressure on inflation.
Global financial conditions could tighten
The US outlook depends on the pace of investment in artificial intelligence (AI) and related equity market gains. A sharp reassessment of the prospects for AI could trigger an equity market correction, which would weaken both consumer confidence and household wealth in the United States and abroad.
At the same time, yields for long-term government bonds could rise if investors demand greater compensation given the rapid accumulation of public debt worldwide.
Either development would tighten financial conditions and weaken demand for Canadian goods and services, creating excess supply and adding downward pressure on inflation in Canada.