The Bank of Canada (BoC) kept overnight lending rates unchanged at 2.25%, marking a seventh consecutive hold. In the space of a few days, the landscape around that decision has changed.  

An escalating trade war with the U.S., ongoing energy inflation keeping CPI elevated, and a summer uptick in jobs have complicated factors influencing the Bank’s decision.  

"Since our last decision, inflation and growth in Canada have evolved broadly as forecast. Against that background we decided to leave the policy rate unchanged," Governor Tiff Macklem says in today's opening statement. "However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain." 

Collapse in negotiations reignites U.S.-Canada trade war  

On August 22, the U.S. slapped a 50% tariff on select Canadian goods after bilateral trade talks collapsed. The new tariff regime took effect under Section 338 of the Tariff Act of 1930—the first time any U.S. president has invoked that authority. U. S. tariffs apply to specified Canadian goods regardless of CUSMA status and carry no expiry date.  

Canada responded with matching retaliatory tariffs on $27.6 billion worth of U.S. imports. Canada’s reciprocal tariffs effective September 8 target U.S. steel, aluminum, dairy, appliances, agricultural equipment, pulp, paper, plastics, and electronics.

British Columbia faces an outsized hit. Wood and paper products alone account for more than 13% of the province's total exports to the U.S., the highest share of any province.

For the BoC, tariffs threaten Canada’s economy through:  

• Price pressures: Costlier imported goods and disrupted supply chains  
• Muted growth: Weaker exports, reduced business investment, job losses, softer hiring, and eroded consumer confidence  

“The question is whether companies pass those costs directly or eat them on margin, and how long that takes to filter through. It's not a very clean signal,” says Tiago Figueiredo, macro strategist at Desjardins, and a former BoC analyst. “That's why the bank has to acknowledge the developments on trade, but it's simply too early to tell what the impacts are going to be.”

RBC economics writes, “New tariffs in August will cause hardship for businesses impacted, but it affects a small share of cross-border trade overall.”

High energy costs keep inflation above target

July CPI came in at 3.0% at the top of the Bank's 1–3% target band, and up from 2.8% in June. The headline number looks concerning, but the Bank may not be treating it that way yet.

High costs of gasoline have contributed to most of July’s year-over-year inflation. Pump prices rose 25.7% YoY in July, driven by ongoing Strait of Hormuz blockades and partial Red Sea shipping closures. Strip out gas, and CPI held steady at 2.2% for a third straight month.

Core inflation (which excludes volatile energy and food prices) doesn’t appear to reflect a broad energy shock spillover.  

As Figueiredo puts it: "We really haven't seen higher energy prices pass through to other goods and services in any material way."

But industries directly linked with fuel prices such as travel services are showing double-digit YoY increases. Tour prices jumped 15.2% YoY, and airfare rose 12% YoY, partly reflecting FIFA World Cup demand in Toronto and Vancouver. Whether these spikes are temporary, remains to be seen.

"Even if oil prices come down, given the pressures we're seeing on refined prices and diesel, relief may not come through as much as people expect," Figueiredo says.

What makes the Bank cautious is the lag. Fuel surcharges are spreading quietly through supply chains in ways July's CPI may not have fully captured. The BoC said in July that "war-related cost pressures are still working their way through some consumer prices”. Strait of Hormuz traffic, including rerouted shipments, is running at just over half of pre-conflict volumes, and air strikes have since resumed. 

"The longer oil prices and refinery margins stay high, the greater the risk that higher energy prices spill over and turn into persistent inflation," says Governor Tiff Macklem at today's address.

The 2026 energy story may not be over and it's likely not yet fully evident.

Is recovery at risk? Canada could lose 90,000 jobs to new 50% U.S. tariffs

Canada's July jobs report added 75,100 positions against a forecast of 15,000, pushing unemployment to a two-year low of 6.4%. Q2 GDP came in at 3.3% annualized—the fastest pace since early 2023. While recent economic indicators look like a recovery, the problem is they reflect an economy that has yet to absorb the impact of 50% tariffs.

July's flash estimate already shows no growth to start Q3. BoC's July Monetary Policy Report projects just 0.7% GDP growth for the full year—an economy with little room to absorb an extended energy shock.

An August 2026 Oxford Economics report, commissioned by the Canadian American Business Council, estimates 2.5 million Canadian jobs depend on the U.S.–Canada bilateral trade relationship. Jobs impacted spread across sectors with deep U.S. exposure.  
 

Source: Oxford Economics / Canadian American Business Council, August 2026. Figures measure direct and indirect employment supported by exports to the U.S. Base year: 2024.

University of Calgary economist Trevor Tombe estimates tariffs could cost Canada nearly 90,000 jobs if they hold: roughly 36,000 in Ontario, 18,000 in Quebec, 11,000 in B.C., and 9,000 in Alberta—pushing unemployment from 6.4% to around 6.8%. Tombe flags that the impact could depend on whether businesses treat 50% tariffs as permanent or absorb a temporary hit without cutting headcount.

Figueiredo notes that through the summer, job losses have been concentrated in trade-exposed sectors, while less exposed ones held up—a tentative sign of resilience. The latest escalation, he says, puts that selective improvement in question.

Canadian housing update: activity remains muted, not yet in recovery mode

Housing appears to be finding a floor, but slowly. The MLS Home Price Index was down 3.3% YoY in July to $661,800, though the gap has narrowed every month since January, with July the smallest decline since October 2025. The national average sale price edged up 0.2% YoY to $674,819.  

As Figueiredo puts it, "Affordability concerns are still present. House prices have come down, but the progress really hasn't been as much as people would like."

Reduced housing supply isn't helping. Housing starts fell 5% in July to an annualized 229,074 units, with Vancouver down 42% YoY and Toronto down 10% YoY. The Bank's most recent monetary policy report pointed to the same drag: slow population growth, affordability barriers, and a large overhang of unsold small condominiums.  

Most provinces are converging toward long term averages, according to the CREA. Ontario was hovering slightly over its long-term average in July after favouring buyers through April. Saskatchewan, New Brunswick, and Newfoundland and Labrador are still borderline sellers’ markets.

Before the latest tariff escalation, a modest fall market uptick looked plausible, says Victor Tran, mortgage and real estate expert at Rates.ca. 

But buyer confidence remained muted in July. Rates.ca quoter data shows homebuyer purchase interest held at 28% in July, unchanged MoM and from a year ago. Renewals have climbed six percentage points YoY to 63% in July but remain near the 62.6% YTD average. Canadians appear to continue to reprice but remain cautious on picking up new mortgages.

Read more: Why Canadian housing seems unaffordable in 2026: A 35-year real estate disconnect

Mortgage renewals: the worst may be over

The peak of the payment shock cycle is likely behind us. Figueiredo says households renewing now are largely coming off mortgages originated during years when rates were higher.  

"It's probably fair to say we've passed the peak," he says, with 2027 renewals expected to be considerably smoother compared to 2024 and 2025. "Households renewing this year will still face larger payment shocks, but going into 2027, those shocks are going to be much more manageable."  

Renewal interest quote volumes on Rates.ca peaked through 2025 and fell heading into 2026: 40–50% lower in 2026 than the same months a year earlier. This drop may be a signal that the heaviest wave of mortgage holders repricing at higher rates has moved through the system.  

Learn more: Nearly half of Canadians renewing mortgages spend over 50% of their budget on housing

The bond market bears watching too. Even if the Bank of Canada cuts its overnight rate (the rate that directly influences variable-rate mortgages)—that's only half the equation for Canadian homeowners. Fixed mortgage rates are priced off government bond yields, which the Bank doesn't directly control. And those yields are being pushed up by forces far beyond Canada's borders.  

Figueiredo points to heavy government borrowing and rising corporate debt from AI companies competing for the same investor pool. When that much debt floods the market at once, investors can demand higher returns before they'll lend. This jockeying for debt pushes bond yields up, and Canadian lenders pass those higher costs directly to borrowers through fixed mortgage rates.  

The practical consequence for Canadian mortgage holders—who typically renew their mortgages every three to five years, unlike American homeowners who can lock in for 30 years, is that rate relief from the Bank may not show up at renewal the way many are hoping.  

"Even if the Bank can cut," Figueiredo says, "we might not see as much reprieve as you'd normally expect, with these more structural factors at play."

A tempered future outlook

The Bank finds itself navigating a trade war whose full economic impact hasn't landed yet, while trying to read signals pulling the economy in opposite directions, Figueiredo says.  

Even if crude prices ease further, Figueiredo cautions that refinery margin pressure means relief at the pump isn't guaranteed. And higher energy prices aren't a straightforward win for Canada. While Alberta benefits directly from crude oil profits, Ontario and B.C. consumers largely absorb higher energy costs without an immediate offsetting local gain.

"Higher energy prices can have very different effects depending on region," he says, "and it just complicates the Bank of Canada's policy setting, because they set policy for the entire economy, not just for different regions."
 

Here's what major Canadian banks predict for the next quarter to Q2 2027
 

Legend: ▼ Rate cut | ■ Hold | ▲ Rate hike

Source: BMO, CIBC, TD, RBC, Scotiabank, and National Bank economics and rate outlook reports, as of August 30, 2026. Forecasts subject to change.

Since July 15, no Canadian bank has changed its near-term call. Five of the six banks expect a hold through 2026 but the August tariff escalation has shifted some 2027 outlooks. Scotiabank's October hike forecast, the most aggressive near-term call, would represent a 50-basis-point jump directly from 2.25% to 2.75%.

“Our house view is that the bank is probably going to be on hold this year. Next year, it's looking increasingly likely that the central bank will have to raise rates, but for this year, there are downside risks to economic growth that the bank will be watching very closely," Figueiredo concludes.

Read next: Ask the Mortgage Expert: Why this could be your window of opportunity into Canadian real estate