September 2, 2026

The Bank of Canada stood pat today:

The Bank of Canada today held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

The continuing conflict in the Middle East is keeping energy prices high. As well, new US tariffs and Canadian counter-measures have been announced following the breakdown of trade talks between Canada and the United States. Both situations remain fluid.

In the United States, economic growth continues to be solid, driven by consumer spending and AI-related investment. Growth in the euro area was stronger than expected in the second quarter, while China’s economy slowed. Overall, the global economy has shown resilience in the face of geopolitical headwinds, with growth broadly consistent with the July Monetary Policy Report (MPR) projection. With still-high oil prices and elevated margins for refined energy products, inflation in most countries remains high.

Financial conditions have tightened since July. Long-term bond yields have moved up globally, including in Canada. The Canadian dollar has appreciated slightly on US-dollar weakness.

As expected, Canadian economic activity strengthened in the second quarter, with GDP up by 3.3%, following very weak growth in the first quarter. While some of the recent strength reflected temporary factors, the pick-up in activity was broad-based. Consumption showed solid gains. Following several weak quarters, there was some rebound in housing activity. Exports and business investment were up sharply. Labour market conditions have improved in recent months, with the unemployment rate edging down to 6.4% in July. Still, demand for labour remains subdued and indicators point to continued excess supply in the economy.

Overall, recent data reaffirm Governing Council’s view of a broadening recovery in Canada’s economy. However, uncertainty is high and new US tariffs and threats of further action pose risks to the sustainability of the recovery.

CPI inflation has been hovering around 3% in recent months, mainly because of persistently higher gasoline prices. So far, there has been little evidence of higher energy prices spreading to other components of inflation: excluding gasoline, inflation was 2.2% and measures of core inflation remained close to 2% in July. However, with the Middle East conflict still ongoing and little progress reopening the Strait of Hormuz, upside risks to the Bank’s inflation forecast have increased. The longer that high oil prices and elevated refinery margins persist, the greater the risk of spillover to the prices of other goods and services. New US tariffs and Canadian counter-tariffs will also raise costs for some businesses and could feed into consumer prices over time.

With the economy and inflation evolving broadly as forecast in the July MPR, Governing Council agreed to leave the policy rate unchanged. However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain. Governing Council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed. The Bank remains committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.

Mark Rendell in the Globe reports:

However, Governor Tiff Macklem struck a hawkish tone in the press conference after the rate announcement, leading bond traders to increase their bets on an interest rate hike before the end of the year.

Mr. Macklem said the central bank is navigating two major risks: the global energy price shock caused by the war in the Middle East, and the escalation in the Canada-U.S. trade war following the breakdown in negotiations last month.

Of the two, he appeared more concerned that high oil prices could feed through into other consumer prices and become generalized inflation in Canada.

“There’s been a breakdown in trade discussions with the United States, and that certainly makes [Canada’s economic] rebound more uncertain,” Mr. Macklem said.

“But as I stressed, we have to keep our eye on inflation. Inflation is running too high. The situation in the Middle East is no closer to resolution, and the longer it goes, the bigger the chance [the oil price shock] feeds through. Where we go on interest rates is really going to be guided by our inflation forecasts and our risks around that,” he said.
…
“If we felt that inflation was going to remain too high, yes, we are prepared to raise interest rates. And if it takes more than one increase, we’re prepared to do that. But that’s certainly not the only outcome,” Mr. Macklem said.

Before the rate announcement, financial markets put the odds of a quarter-point interest rate hike in December at around 60 per cent, according to Bloomberg data. After the announcement, the odds rose to almost 90 per cent, with traders now pricing in three to four quarter-point hikes by the end of next year.

The yield on five-year Government of Canada bonds – which underpin many fixed-rate mortgages – rose about a tenth of a percentage point after the announcement to 3.42 per cent. That’s the highest level since mid-2024.

Regular reports are still delayed, I’m afraid. I’ll catch up soon!

Update, 2026-9-3 & 2026-9-5: PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.33% on 2026-09-02. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 200bp from the 210bp reported August 26 to 200bp.

Update, 2026-9-5: