Monetary Policy Report—October 2026
Inflation in Canada is projected to remain above 3% through much of 2027, materially higher than previously forecast. The Canadian economy entered the second half of 2026 on firmer footing, and the outlook for economic activity has been revised up. Uncertainty remains elevated.
The war in the Middle East has entered its eighth month, and damage to refining capacity continues to disrupt global energy markets and supply chains. Oil prices have increased and refinery margins are elevated, which has pushed gasoline and diesel prices higher. Prices of non-energy imports have also increased.
With measures of core inflation still near 2%, high energy costs have not yet spread broadly to other prices. But cost pressures are building, and businesses anticipate passing on more of their increased costs to customers.
Higher gasoline and diesel prices combined with increased cost pass-through have pushed up the forecast for inflation. Inflation is projected to remain above 3% through much of 2027—longer than anticipated in the July Report. It then gradually declines and settles around the 2% target by the middle of 2028 as cost pressures fade.
There is considerable uncertainty around the outlook. In particular, it remains unclear how long energy prices will stay high, given the rapidly evolving situation in the Middle East, and how quickly and fully higher costs will pass through to consumer prices.
The economy came through the middle of 2026 on firmer footing than expected. In the second quarter, growth picked up and broadened. Household spending grew strongly despite slow population growth. Businesses showed signs of adapting to the shift in Canada’s trade relationship with the United States, and investment and exports rose.
Since the July Report, trade tensions have escalated again. Although the direct effects of the latest US tariffs are concentrated in a relatively small share of Canadian exports, renewed uncertainty means businesses may delay expansion and hiring plans, which would weigh on growth. At the same time, elevated oil prices are raising the value of Canada’s exports and adding to government revenues.
Growth in gross domestic product is expected to slow in the fourth quarter of 2026, partly as a result of trade tensions. It is then projected to pick up and average 2% in 2027 and 2028, somewhat stronger than anticipated in the July Report. Resilient foreign demand supports non-commodity exports, while energy exports remain strong. Business investment increases in response to recent government incentives. Government spending also rises. But the strength of the pickup in economic growth remains uncertain, particularly given that it is unclear how businesses may respond to recent developments.
There are both upside and downside risks around energy and trade. Further disruptions to energy supply could increase cost pressures, while a quick resolution of the conflict in the Middle East would limit spillovers to broader prices. An escalation in trade tensions could weigh further on activity, while an agreement that reduces tariffs and uncertainty could lift exports and business investment (see the Risks section).
The Bank of Canada has a new macroeconomic model for projection and policy analysis—Prima. Models are tools that help the Bank interpret data and better understand the forces shaping the economy.
In Prima, costs reflect the balance between supply and demand within each sector of the economy. The model traces how costs move through supply chains and affect the five major components of the consumer price index.
The forecast for inflation has changed significantly since the July Report, mostly because of the upward revision to energy prices. For the October Report, Prima helped analyze how high energy prices affect economic activity and inflation (see the Outlook section and In focus: Using Prima to trace how an energy shock affects inflation).