Monetary Policy Report—October 2026
The evolution of energy prices and Canada’s trade relationship with the United States remain the two most important risks to the outlook for inflation.
The projection assumes that shipping through the Strait of Hormuz gradually returns to normal and refinery margins ease. Further supply disruptions could push fuel prices higher than projected, and prolonged disruptions could keep them elevated for longer. Higher fuel prices would raise inflation.
However, the conflict in the Middle East could be resolved quickly and oil shipments from the region could return to normal sooner. This would lead oil prices to decline further and faster than assumed. Moreover, if refining capacity recovered more quickly than expected, fuel prices could normalize sooner than anticipated in the outlook.
The base case assumes that US tariffs incorporated in the projection remain in place. The effects of trade‑related uncertainty are assumed to fade gradually. Further US trade restrictions or more persistent uncertainty could weaken exports, business investment and household spending. Softer demand would lower costs and restrain the pass‑through from higher energy prices.
However, Canada and the United States could reach a trade deal that reduces tariffs and related uncertainty. This would increase exports and business investment, boosting employment and incomes. Higher demand could increase the pass‑through from higher energy prices. The removal of counter‑tariffs would provide an offset.
The outlook for inflation is subject to other risks as well.
Other upside risks to inflation
- Higher input costs could pass through to consumer prices faster than expected, and inflation expectations could respond more strongly than usual, particularly with the post‑pandemic inflation experience still top of mind. This would increase inflation more than anticipated, even if input costs follow their projected path.
- Domestic demand could be stronger than projected. Household spending could remain more resilient. Business investment could also respond more strongly to recent investment incentives. In addition, businesses could face greater capacity constraints before new production comes online. Together, these factors would result in inflation being higher than projected.
Other downside risks to inflation
- Global financial conditions could tighten more than expected, and long‑term bond yields could rise further. Investors could become less optimistic about earnings and productivity gains related to artificial intelligence, triggering a fall in equity prices and wider corporate spreads. Higher borrowing costs and lower household wealth would weaken global spending and investment. This would reduce demand for Canadian exports and lower commodity prices, putting downward pressure on inflation in Canada.
- The effects of uncertainty, particularly around the Canada‑US trade relationship, could be larger than expected, leading to lower household spending and business investment. In particular, uncertainty could reduce the impact of government incentives on business investment. Weaker domestic demand would reduce cost pressures. In addition, lower consumer spending would lead businesses to absorb more of the cost increases related to high energy prices. Taken together, these effects would keep inflation below its projected path.