Monetary Policy Report—April 2026
The risks around inflation are unusually high. The main risk is associated with trade relations with the United States. The war in the Middle East presents a new risk.
Uncertainty is unusually elevated around US trade policy and the war in the Middle East. The base‑case projection assumes that current trade policies remain in place and that conditions in major shipping routes normalize and global oil prices decline in the second half of the year.
In both cases—US trade policy and the war—there are two layers of uncertainty: how events evolve and how these shocks transmit through the economy as businesses, households and governments adjust. The outlook for inflation hinges on how these uncertainties resolve.
Main upside risks to inflation
The war in the Middle East could stoke inflation further
A more prolonged or more severe war could further disrupt energy markets and global supply chains, leading to broadening and more persistent price pressures. Higher energy prices would raise production and transportation costs globally and could be passed through to consumer prices more than assumed in the base‑case projection (see In focus: The war in the Middle East—Transmission channels and risks to inflation).
Supply chain disruptions could also be more extensive. Disruptions to shipping routes and to the supply of fertilizers and other chemical products could place more upward pressure on prices of food and other non‑energy goods.
For Canada, persistently higher global oil prices would boost activity, particularly related to investment in the oil and gas sector. In the base‑case projection, longer‑term inflation expectations remain well anchored. However, higher inflation in gasoline and food prices could push up expectations more than assumed. This is because households tend to place greater weight on these frequently purchased items when forming views about overall inflation. With the 2022 inflation surge still fresh in people’s minds, households and businesses may also be more attentive to near‑term price increases. This raises the risk that higher expectations feed into wage- and price‑setting behaviours. This risk increases if war‑related price pressures turn out to be more persistent or more severe than anticipated.
Restructuring is more costly
The economy is adjusting to the impact of US tariffs. Businesses are seeking new markets and diversifying their supply chains. Over the projection horizon, capital and labour are expected to move to sectors of the economy not affected by tariffs.
Assessing the cost of this adjustment is challenging. 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
CUSMA outcome is worse than assumed
The base‑case projection assumes that the tariffs and trade policies currently in place persist over the projection horizon (see the Tariff and other assumptions section). It also assumes that the 2026 review of the Canada‑United States‑Mexico Agreement (CUSMA) preserves the existing trade deal, reducing uncertainty for both exporters and integrated North American supply chains.
However, a worse outcome could take one of several possible paths, each with different implications for the outlook (see In focus: The review of the Canada‑United States‑Mexico Agreement in the January Report). The parties could extend the agreement but only after significant negotiations and amendments to the agreement, which could potentially further limit access to the US market. Alternatively, the parties may not extend the agreement, leading to ongoing annual reviews that prolong uncertainty. Another possible, more adverse outcome would be a US withdrawal from CUSMA.
Depending on the result of the review, these main effects could come through:
- reduced access to US markets, which would weigh on exports, investment and activity
- heightened uncertainty that could depress business and household confidence and delay spending and hiring
On balance, the outcome of the CUSMA review is assessed as a downside risk for economic growth and inflation.
Trade restrictions weigh on demand more than expected
The economy is adjusting to the impacts of US tariffs. However, the effects on demand are hard to assess. Business confidence could be affected more than expected, leading to greater weakness in business investment and hiring. As well, fears of job loss could make households more cautious, leading to lower spending and exacerbating weakness in the housing market. Weakness in demand would lead to lower inflation.
The war could weigh more heavily on global growth
The war in the Middle East could weaken global economic growth by more than assumed in the base‑case projection, reducing demand for Canadian exports. Increased geopolitical risks and higher energy prices could lead to a substantial tightening in financial conditions, and more persistent uncertainty could weigh on household and business confidence. This would dampen spending and business investment and hiring, particularly in energy‑importing economies. Softer demand for Canadian goods and services would increase excess supply in the Canadian economy and put downward pressure on inflation.