Bank of Canada Raises the Overnight Rate to 2.5%, Says More May Be Needed

General Kim Franz 28 Oct

 

Today, the Bank of Canada raised the overnight rate by 25 bps to 2.5%, joining the six other G-10 central banks that have tightened monetary policy to combat inflation. The Federal Reserve hiked the fed funds rate at its last meeting and is expected to hike rates again this afternoon. Washington may delay the next hike until after the midterm elections.

The BoC’s decision was difficult, as labour markets are soft and economic activity and inflation are more muted than in the US. The labour market has shed jobs two months in a row, while US tariffs and reduced immigration are creating headwinds for some sectors. Macklem is concerned that inflation will remain above target for an extended period and warns that additional increases in borrowing costs may be needed. The Bank estimates the neutral range for interest rates is 2-1/4%-to-3-1/4%.

But policymakers appear to be less worried now about some of those downside risks. The Bank has said the damage from the escalation in trade tensions will largely be concentrated in a small number of sectors.

Fiscal policy is also helping to cushion the economy. Prime Minister Mark Carney’s government has reduced gasoline taxes and, along with Ontario’s government, provided relief programs to manufacturing sectors hit hard by tariffs. We will know more on the fiscal front when Ottawa brings down the budget on November 5.

Throughout the trade disputes, Macklem and the bank have argued that governments are better positioned to help households, industries and regions being hurt most by tariffs. The central bank can only set short-term borrowing costs based on broader economic conditions.

Some provinces, like Ontario, Quebec and British Columbia, are being hit by tariffs and the slower housing market, while oil-rich provinces like Alberta and Saskatchewan are benefiting from higher energy and commodity prices.

Housing activity remains subdued, and prices are still sliding in some markets. But Senior Deputy Governor Carolyn Rogers reminded people in a recent speech that the central bank doesn’t set interest rates just for the housing market.

Headline inflation has been stuck around 3% for months because of elevated gasoline prices. Core inflation has held near the central bank’s 2% target so far, and there’s scant evidence higher energy costs are feeding through more broadly.

Other signs could worry officials if the Middle East conflict continues. The Bank’s surveys show consumers’ longer-term inflation expectations have ticked higher, while companies increasingly expect to pass higher input costs on to their customers.

“Uncertainty” seems to be the key word for Macklem during this press conference. He’s reiterated it numerous times.
The Bank of Canada hiked the overnight rate by 25 bps to 2.5%.

Bottom Line

The Bank of Canada revised its forecast as follows:

  • The central bank issued a revised forecast that sees much hotter inflation — 3.5% by the end of this year. Policymakers don’t expect to hit their 2% target until mid-2028.
  • “The main argument for an increase was that energy prices are higher, they are expected to remain higher, and cost pressures are building,” Governor Tiff Macklem said in prepared remarks.
  • Economic growth is looking much stronger. Officials raised the outlook and now expect the economy to expand 1% in 2026, accelerating to 2% in 2027 and 2028.

Macklem says the BOC highlighted inflation since September and emphasized the high level of uncertainty in the Middle East and in Canada/US relations, as well as how quickly those events pass through to the economy. He says there’s no predetermined path and repeated that they’ll make decisions one meeting at a time.

Macklem says changing direction is a difficult decision, and you want to look at it through more than one lens. One lens is the economic projection in the monetary policy report, which shows inflation is higher and will stay higher for longer. He says the implication is pretty clear — there’s less scope for accommodation. Against that backdrop, the governing council agreed an interest rate increase made sense. But he adds that forecasts are highly uncertain.

In the last several months, Macklem says the balance of risks has shifted: Inflation is looking less likely to be contained. Today’s rate increase looks more like an “insurance policy” rather than the beginning of a series of rate hikes. The decision rests on stronger economic growth ahead, and that assumption will be tested, especially as the labour market still shows signs of slack. The Bank’s room to raise rates further is limited. Financial conditions have already tightened, and while higher interest rates cannot fix a supply disruption, they can further weaken demand.

Central banks tend to start their rate cycle with consecutive moves. It would require weakening economic activity or slower inflation than expected. With that in mind, we think the BOC will hike again in December. However, this is more about bringing forward hikes we had expected in early 2027.

The communications make it clear that the central bank wants to stay ahead of the curve and “avoid the debacle” of 2022-23, when it was too late to raise the policy rate, he added.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian CPI Inflation Edges Up to 3.1% in September, While Core Inflation Slowed Further Below Its 2% Target

General Kim Franz 19 Oct

The Consumer Price Index (CPI) rose 3.1% year over year in September, up from 3.0% in August. Higher gasoline prices led the acceleration in September (+27.8%) compared with August (+22.8%). Excluding gasoline, the CPI rose 2.2%, after increasing 2.4% in August.

Moderating the acceleration in the all-items CPI in September were smaller year-over-year price increases for travel tours and groceries compared with the previous month.

The CPI increased 0.1% month over month in September. Seasonally adjusted, the CPI rose 0.4%.

Energy prices accelerated in September, rising 19.0% year over year after a 15.4% gain in August. Crude oil prices rose in September, reaching their highest level since May amid ongoing uncertainty about the wars in the Middle East, which pushed up gasoline and fuel oil prices.

Year over year, prices for gasoline rose at a faster pace in September (+27.8%) compared with August (+22.8%). The switch to the less expensive winter blend moderated the increase in gasoline prices in September.

Similarly, prices for fuel oil and other fuels rose 57.8% year over year in September, following a 43.7% increase in August. The price increase in September had a greater impact on consumers in Atlantic Canada, where fuel oil is more widely used.

Prices for food purchased from stores rose 1.7% year over year in September, after increasing 2.8% in August. Although price levels remain high, this was the smallest yearly increase since May 2024 (+1.5%), and the second consecutive month where grocery price growth increased at a slower pace than the all-items CPI.

Driving the year-over-year slowdown in grocery prices in September 2026 were declines in prices for fresh vegetables (-2.9%) and sugar and confectionery (-2.7%). Prices for other food preparations (+1.8%) and fresh or frozen beef (+8.7%) rose at a slower pace in September than in August (+2.8% and +11.0%, respectively), also contributing to the slowdown.

Despite the year-over-year slowdown in grocery prices, prices have increased 33.0% since September 2020.

In September, shelter prices rose 1.8% year over year, up from a 1.5% increase in August. In addition to higher prices for fuel oil and other fuels (+57.8%), faster price growth in homeowners’ home and mortgage insurance (+4.9%) and homeowners’ maintenance and repairs (+1.2%) drove the acceleration.

The homeowners’ replacement cost (-1.9%) and mortgage interest cost (-0.2%) indexes fell at the same rate in September as they did in August. Meanwhile, rent prices rose 2.8% year over year, matching the August increase.

In addition to the slowdown in core measures, the share of CPI components rising at 3% or higher fell to 29.2% from 34.2% in August.

Year over year, prices rose faster in five provinces in September than in August, mainly because of higher prices for gasoline and fuel oil.

Excluding energy, inflation was higher in Nova Scotia (+3.3%), Prince Edward Island (+2.6%), New Brunswick (+2.6%), and Newfoundland and Labrador (+2.4%) in September, compared with the national movement (+2.1%). At the provincial level and on a year-over-year basis, rent prices rose at the fastest pace in Atlantic Canada.

Economists surveyed by Bloomberg had expected the headline inflation rate to tick up to 3.2% in September from 3% in August, and yearly change for the Bank of Canada’s preferred core measures to remain the same.

The Canadian dollar trimmed its gains after the report. It still remained stronger on the day against the US currency, trading 0.3% up to C$1.4101. The loonie has advanced about 1% so far in October.

Traders in overnight swaps placed the odds of a rate hike this month at nearly 70% prior to the CPI release, and edged back slightly after the smaller-than-expected increase in price growth.

The 12-month change in the Consumer Price Index (CPI) and CPI excluding gasoline
Source: all above data is provided by Statistics Canada

Bottom Line

Today’s inflation report reinforces our view that higher gasoline prices temporarily boost headline inflation while further eroding household purchasing power. However, these energy-driven increases, largely tied to geopolitical tensions, are unlikely to trigger a broader resurgence in underlying inflation. While food and shelter continue to account for a disproportionate share of price growth, inflationary pressures across the economy are generally moderating amid slowing domestic demand.

At the same time, recent labour force data has underscored some of the economic vulnerabilities facing Canada as the US trade war drags on. Employment fell in Canada by 41, 200 since the end of last year, the largest year-to-date loss since the 2009 financial crisis, excluding 2020 during the Covid-19 pandemic.

The duration of the disruption in the Strait of Hormuz remains a key risk. The longer the shipping route remains closed, the longer energy prices are likely to remain elevated. Even so, the September data support our base-case scenario that the Bank of Canada will remain on hold at its October 28 meeting. Policymakers will continue to closely monitor incoming inflation data and stand ready to tighten policy if price pressures broaden and become more persistent. Still, for now, underlying inflation trends in Canada remain consistent with a patient, wait-and-see approach.
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Rising-Rate Jitters Sidelined Buyers in September, Tempering Sales For The Remainder Of This Year

General Kim Franz 16 Oct

The number of home sales recorded over the Canadian MLS Systems fell by 2.3% m/m in September as inflation fears triggered the biggest bond selloff in years. Rising fixed mortgage rates have spooked potential buyers, even as home prices continue to fall.

“After a four-month run of modestly positive progress on demand, supply, and prices, many of Canada’s housing markets took a step back in September. This was hardly surprising given the latest jump in fixed mortgage rates, and with the Bank of Canada now widely expected to follow with a rate hike before the end of the year,” said Shaun Cathcart, CREA’s Senior Economist. “With housing affordability already stretched, the big question going forward is how much farther will the Bank have to go to keep a lid on inflation next year? Until that becomes clearer, this fresh round of uncertainty will likely send some buyers back to the sidelines.”
New Listings

New listings resumed their downward trend in September following a rebound in August, falling 1.8% on a month-over-month basis in September 2026. Overall, new supply has generally been declining since early 2025.

“In a repeat of what we saw earlier this year when the start of the spring market coincided with a jump in mortgage rates, the start of the fall market has likewise been met with an even larger jump in fixed rates,” said Garry Bhaura, CREA Chair. “While that makes the task harder for prospective home buyers as it relates to a mortgage, it will also likely mean more homes to choose from and more negotiating power. For sellers, a well-thought-out pricing strategy will become even more important.”

With the decline in sales only just outpacing the drop in new supply in September, the national sales-to-new listings ratio eased slightly to 48.8% compared to 49.1% in August. The long-term average for the national sales-to-new listings ratio is 54.7%, with readings roughly between 45% and 65% generally consistent with balanced housing market conditions.

Slightly more than 200,000 properties were listed for sale on all Canadian MLS® Systems at the end of September 2026, up 1.8% from the same time last year and a little above the long-term average. Overall supply has held steady at historical average levels since spring 2025.

National inventory was 4.9 months at the end of September 2026, up slightly from this summer but in line with the long-term average. One standard deviation above or below that long-term average, a seller’s market would be below 3.6 months, and a buyer’s market would be above 6.4 months.
Home Prices

The National Composite MLS® Home Price Index (HPI) edged down 0.4% from August to September. The monthly decline following four months of stable prices reflected a fresh step down for prices in Ontario where demand softened in September, alongside the ongoing moderation of offsetting price gains on the Prairies, in Quebec, and on the East Coast.

The non-seasonally adjusted National Composite MLS® HPI was down 3.4% compared to September 2025, marking the first time that the year-over-year decline had grown larger since January.
Bottom Line

While we do not expect a Canadian rate hike at the October 28 meeting of the Bank of Canada, the odds currently favour a 25-basis-point increase in the overnight policy rate at the last meeting of this year on December 9. To be sure, the Canadian inflation-growth picture favours a continued pause in BoC action; worldwide pressure for a more aggressive inflation response will likely drive Canadian policy as well.

The war with Iran is unlikely to end soon, keeping upward pressure on oil prices, which is spilling over into the cost of a wider array of goods and services. The GTA and the GVA continue to suffer relatively weak demand in the condo sector. CREA has reduced its forecast for home sales in 2026-2027.

Key to the October 28th action will be the CPI data released on Monday, along with the business and consumer outlook surveys. The latest inflation data will be crucial to the bank’s decision, with the headline yearly change in the consumer price index holding near 3% for months, a level Governor Tiff Macklem has called “too high”. Markets put the odds of a hike at the end of the month at about 30% as of Friday morning, with most economists not seeing the central bank tightening borrowing costs just yet, though hikes are likely to start sometime in 2027.
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

The Very Weak September Jobs Report For Canada Will Give the BoC Second Thoughts About Hiking Rates

General Kim Franz 13 Oct

Employment fell in September, continuing a stream of lacklustre labour force surveys. Canadian jobs fell by 68,300, wiping out all of this year’s job gains as the trade war with the U.S. drags on and the Iran war continues. The employment rate fell for a second consecutive time by 0.2% percentage points to 60.6%. Roughly half of the employment loss was in full-time work (-35,000; -0.2%) and half in part-time work (-33,000; +0.9%).

The employment decline was concentrated among youth aged 15 to 24 (-48,000; -1.8%) as well as women aged 25 to 54 (-28,000; -0.4%). In September, public sector employment fell by 70,000. This was the fourth consecutive monthly decline for the sector. On a year-over-year basis, the number of public sector employees was down by 119,000 (-2.6%), with most of the decline attributable to employment in educational services.

The number of private sector employees was little changed for a second consecutive month in September, but it was up by 163,000 (+1.2%) compared with 12 months earlier.

Self-employment edged down in September (-23,000; -0.8%). This follows an upward trend from April to July. Year on year, self-employment was up by 51,000 (+1.9%).
The unemployment rate rose 0.1 percentage points to 6.5% in September. Earlier in the year, it reached a recent peak of 6.9% in April, before declining to 6.4% in July and August. The unemployment rate in September was the same as it was at the start of the year (6.5% in January).

The layoff rate was 0.7%, similar to the rate observed a year earlier (0.6%) and the average during the period from 2017 to 2019 (0.6%) (not seasonally adjusted).

The job-finding rate was 30.6% in September, down from 32.8% 12 months earlier and below the average of 36.5% during the period from 2017 to 2019.

The labour force participation rate fell 0.2 percentage points to 64.8% in September. This was the lowest level since December 1997 (when it was also 64.8%), excluding 2020 during the COVID-19 pandemic. Year over year, the participation rate fell 0.4 percentage points in September 2026, largely due to population aging.

In September 2026, people aged 65 and older accounted for 23.2% of the working-age population in the Labour Force Survey, up from 20.5% in September 2019. In comparison, this share was 14.8% at the turn of the millennium. The upward trend in was briefly paused in 2023 and 2024, as sharp increases in permanent and temporary immigration offset the aging of the population. However, in 2025 and into 2026, the trend towards an aging population resumed.

By sector, fewer people worked in educational services, Health care and social assistance, and manufacturing. Regionally, employment declines were posted in Quebec and British Columbia, while energy-heavy Alberta enjoyed continuing job gains. Alberta’s unemployment rate was 6.4% in September, down both month-over-month (-0.4 percentage points) and year-over-year (-1.3 percentage points).
Among the three largest census metropolitan areas, the unemployment rate rose by 0.7 percentage points to 6.6% in Montréal, offsetting a similar-sized decline in the previous month. In Vancouver, the unemployment rate fell 0.6 percentage points to 6.0% in July. The unemployment rate in Toronto was little changed at 6.7%; however, it was down from a recent high of 9.0% in July 2025.

While the job losses last month were driven by the public sector, the cumulative decline in employment since the start of the year paints a sluggish picture of the labour market. Employment fell in Canada by 41,200 since December 2025, the largest year-to-date loss since the 2009 financial crisis, excluding 2020 during the Covid-19 pandemic.

The September data also gives the first look at the impact of so-called Section 338 tariffs on the Canadian economy. New 50% US tariffs on $20 billion of Canadian goods took effect on Aug. 22 after the breakdown in trade negotiations between the two countries, while retaliatory tariffs on US goods kicked in on Sept. 8. Job losses in August and September total 110,000.

The trade war escalation is expected to weigh on the economy, but the Bank of Canada has put more emphasis on inflation risks, as the Iran war continues to drive up energy prices.

Bottom Line

The Bank of Canada will likely hold off on a rate hike at its October 28 meeting, especially if the inflation data released on October 19 brings no nasty surprises. The Bank of Canada will also publish its Business and Consumer Outlook Survey that day, which will estimate inflation expectations.

Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centre

Economic Insights from Dr. Sherry Cooper

General Kim Franz 7 Oct

The Federal Open Market Committee, the Bank of Canada’s equivalent of the Governing Council, announced last week that it would raise the overnight federal funds rate by 25 basis points to 3.75%-to-4.0%.

The key question is whether it’s a one-off or the start of something deeper and longer.
We suspect the latter. The Fed has more work to do. Resilient U.S. growth, easy financial conditions, and persistent inflation pressures point to another hike in December and further tightening in the first half of 2027.

Under Kevin Warsh, the Fed appears increasingly willing to base policy on observable outcomes rather than uncertain model estimates. US growth remains above trend, unemployment is low, initial unemployment insurance claims are below 200,000, financial conditions remain supportive, capital spending is booming, and inflation has exceeded its 2% target for five and a half years. These conditions explain the unanimous hike and the signal of another hike before year-end, while reinforcing perceptions of the Fed’s political independence and credibility as the Fed and Treasury pull in opposite directions.

The Iran war has been more than an energy shock; it is another global supply-chain disruption. Although far smaller than COVID, it is still significant—and its timing could hardly be worse after years of central-bank inflation overshoots.

Commodity prices are surging, suggesting a broader and more powerful shock than the initial response to Russia’s 2022 invasion of Ukraine. Metal demand, energy demand, and agricultural prices have all increased, contributing supply strain, resulting the overall inflation.

So where does this lead the Bank of Canada when they next meet on October 28? I am sorry to say that the odds favour a rate hike, although it is a close call. I would assign roughly a 60% probability to a hike and a 40% chance of another (the eighth) rate hold. Markets are taking a similar view. As of September 21, CORRA (Canadian Overnight Repo Rate Average)- based pricing implies about a 63% chance of an October hike. The Fed’s rate hike reinforces a broader global tightening cycle.

Canadian headline inflation, though below the US, is still running at a 3% pace. High oil and refined-product prices are lasting longer than the Bank of Canada expected. The longer they remain elevated, the greater the danger that transportation, food and other business costs begin spreading into broader inflation. Canadian counter-tariffs will add some upward pressure to costs, even if the initial effect is modest. Q2 growth was a surprisingly strong 3.3% annualized, with gains in consumption, exports and business investment. Waiting until December could allow inflation expectations and pricing behaviour to become less well anchored.

The Bank’s September deliberations were quite revealing: The Governing Council explicitly said that if energy inflation began spreading into other CPI components, “it could require a monetary policy response.”

Bottom Line

The Bank will not hike simply because the Fed did. It will hike if the October Monetary Policy Report concludes that high energy prices and tariffs are beginning to produce persistent, broader inflation.

My call today: October 28: 25-basis-point hike to 2.50%, accompanied by cautious language and no commitment to a continuing series of hikes.

The decisive evidence will be the next two CPI reports—especially CPI excluding gasoline, core measures and services inflation—along with September employment, wage growth and the Bank’s revised estimate of the output gap. A further weak employment report combined with core inflation remaining near 2% would probably produce another hold.

Written by

Dr. Sherry Cooper

 

 

Weak August Jobs Report In Canada Takes BoC Tightening Off The Table–The Opposite Is Likely For Federal Reserve 

General Kim Franz 7 Sep

Employment in Canada fell by 41,700 in August, reversing some of the labour market momentum seen in recent months as the manufacturing sector posted the only significant increase. The employment rate fell 0.1 percentage points to 60.8%. The employment rate in August was on par with the rate recorded at the start of the year, and up 0.3 percentage points compared with August 2025.

The jobless rate held steady at 6.4% while employment losses were concentrated in Ontario and Quebec, Statistics Canada reported on Friday.

Employment fell among youth aged 15 to 24 (-19,000; -0.7%) and edged down (-16,000; -0.1%) among people in the core-age (25 to 54 years old).

While the overall unemployment rate was unchanged in August, it increased among core-aged men (+0.2 percentage points to 6.0%) and fell for core-aged women (-0.2 percentage points to 5.0%). The unemployment rate was little changed for youth (12.9%) and people aged 55 and older (5.1%).

Employment declined in business, building and other support services (-20,000; -2.8%), public administration (-8,800; -0.7%), natural resources (-7,700; -2.3%) and utilities (-5,600; -3.5%), while it increased in manufacturing (+22,000; +1.2%).

Employment declined in Quebec (-19,000; -0.4%) and edged down in Ontario (-18,000; -0.2%), the two provinces hardest hit by US tariffs. Employment increased in New Brunswick (+2,400; +0.6%) and was little changed in the other provinces.

Average hourly wages among employees were up 2.0% (+$0.71 to $37.02) on a year-over-year basis in August, following growth of 2.8% in July (not seasonally adjusted).

The unemployment rate was unchanged at 6.4% in August. This follows three consecutive monthly declines in May, June and July totalling 0.5 percentage points.

Among the 1.5 million people who were unemployed in August, 24.0% were in long-term unemployment, meaning they had been continuously searching for work for 27 weeks or more. This proportion was similar to that of August 2025 (23.0%) and remained above the pre-COVID-19 pandemic average of 17.1% recorded from 2017 to 2019.

The layoff rate was 0.8% in August, slightly below the rate of 1.0% observed 12 months earlier and similar to the average layoff rate (0.9%) observed for the corresponding months from 2017 to 2019 (not seasonally adjusted). The layoff rate refers to the proportion of people who became unemployed due to a layoff between July and August.

Industries dependent on U.S. demand for exports continue to face an uncertain economic context, compounded by the recent imposition of new U.S.tariffs on Canadian exports. In the 12 months to August, the layoff rate averaged 0.9% for workers in industries dependent on U.S. demand for exports. In comparison, the rate was 0.7% for other industries over the same period.

The participation rate—the proportion of the population aged 15 and older who were employed or looking for work—fell 0.1 percentage points to 65.0% in August, offsetting a similar-sized increase in July. On a year-over-year basis, the participation rate was little changed.
Employment declined in business, building and other support services (-20,000; -2.8%), public administration (-8,800; -0.7%), natural resources (-7,700; -2.3%), and utilities (-5,600; -3.5%) in August. Despite monthly declines, employment in these four industries was little changed year over year.

Manufacturing (+22,000; +1.2%) was the only sector to record a significant increase in employment in August, with most of that increase (+14,000; +1.7%) in Ontario. Year over year, employment in this sector was largely unchanged, as the August increase offset earlier decreases.

Over the 12 months to August, employment growth was concentrated in health care and social assistance (+129,000; +4.5%), information, culture and recreation (+49,000; +5.9%) and transportation and warehousing (+47,000; +4.4%). On the other hand, wholesale and retail trade (-55,000; -1.8%) recorded the largest decline across industries over the same period.

Year-over-year growth in average hourly wages decelerates for the second consecutive month
Average hourly wages among employees in August were up 2.0% (to $37.02) year over year, following growth of 2.8% in July and 3.3% in June (not seasonally adjusted).

Year-over-year growth in average hourly wages remained robust through the post-pandemic period, averaging 4.9% over 2023 and 2024 before decelerating to an average of 3.4% in 2025. Wage growth in August 2026 was the slowest since November 2017 (when it was also 2.0%), excluding the year 2021, during the COVID-19 pandemic.

Year-over-year wage growth was slower for employees with lower wages in August. For employees in the bottom 25% of the wage distribution, average hourly wages were up 1.1% (to $18.66) year over year, while they were up 1.3% (to $26.61) for employees in the second lowest 25% of the wage distribution. In comparison, wages grew faster for employees in the third (+2.1% to $37.99) and top (+2.1% to $65.15) quartiles.

Bottom Line

In a separate release this morning, the U.S. nonfarm payrolls report showed exceptional strength in direct contrast to the Canadian jobs report. The U.S. added 162,000 net new jobs, about triple the consensus estimate. The report included upward revisions for prior months. Wages gained, too, but still trail annualized inflation. The jobless rate held at 4.1%. The labour force participation rate expanded, and the strong report stoked bets on a September Fed interest rate hike when the FOMC meets again on September 15-16.

The Bank of Canada is likely to remain on the sidelines as inflation is weaker in Canada and the economy is vulnerable to a broader slowdown, particularly if the Trump administration introduces even larger tariffs on January 1, as it is currently threatening
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Bank of Canada Holds Policy Rate Steady Again, As Expected

General Kim Franz 2 Sep

Today, the Bank of Canada once again held the policy rate at 2.25%, the level it has held since October 2025. This is the bottom of the Bank’s estimate of the neutral overnight rate, where monetary policy is neither expansionary nor contractionary.

According to the Bank’s policy statement, “The continuing conflict in the Middle East is keeping energy prices high. New US tariffs and Canadian countermeasures have also been announced following the breakdown of trade talks between Canada and the United States. Both situations remain fluid.”

Overall, the global economy has shown resilience in the face of geopolitical headwinds. With still-high oil prices and elevated margins for refined energy products, inflation remains high in most countries.

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.

The Canadian economy strengthened considerably in Q2, with growth of 3.3%, while the Q1 figure was revised up to 0.3% from an initial reading of -0.1%. While some of the recent strength reflected temporary factors, the pick-up in activity was broad-based. Consumption showed solid gains. After several weak quarters, housing activity rebounded. 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 the 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 core inflation measures remained close to 2% in July. However, with the Middle East conflict still ongoing and little progress in 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.

“Economic growth in Canada has picked up after stalling over the past year. That puts us on a stronger footing as we face new challenges,” Macklem said in the prepared text of opening remarks for his press conference. “But uncertainty about the sustainability of the rebound has increased with new US trade actions.”

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.
Bottom Line

The Bank of Canada has shown its willingness to bolster the Canadian economy amid unprecedented trade uncertainty and a record oil price shock. PM Carney is also working to diversify Canada’s trade away from the US, a strategy that has been remarkably successful so far. Canadian export diversification is gaining momentum. In addition, goods imports are also shifting away from the US to the rest of the world.

We maintain our view that the Bank of Canada will keep rates steady this year. If inflation broadens and accelerates, rate hikes are possible, but that is not our baseline forecast. The Bank of Canada will be reluctant to tighten into housing market weakness. While housing activity strengthened since May, momentum is muted, and affordability improvements are likely to taper off in the coming months.

The Federal Open Market Committee meeting is scheduled for September 15-16. Based on comments from Fed Chair Kevin Wash at the annual Jackson Hole Fed confab, a rate hike by the Fed is likely. Traders now predict a 68% chance of a fed funds rate hike of 25 bps.
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canada’s Economy Grows by 3.3% in Q2 as Q1 Was Revised Into Positive Territory

General Kim Franz 31 Aug

Statistics Canada reported this morning that the Canadian economy grew at a whopping 3.3% pace in the second quarter, following an upwardly revised 0.3% in Q1 led by upward revisions to exports, particularly non-metallic minerals and energy products.  This wipes out the two quarters of negative growth that triggered recession fears. Indeed, a sharp rise in exports, household spending and business investment led Q2 growth, both the result of efforts to broaden our trading relationships beyond the US. Exports surged as our trade balance turned positive for the past four months. Canada’s exports of oil to China and Korea are one example of our success in boosting trade. Businesses are increasingly investing in AI-related capital expenditures.

On a per capita basis, real GDP increased 1.0% in the second quarter of 2026, as the Canadian population declined for the third consecutive quarter.

Exports rose 3.6% in the second quarter of 2026, the largest increase since the first quarter of 2023. The rise in exports in the second quarter of 2026 was led by an increase in exports of passenger cars and light trucks (+27.0%), coinciding with a rebound in auto production in Canada following declines in the preceding two quarters. Higher exports of intermediate metal products, energy products, and industrial machinery and equipment also boosted overall export volumes in the second quarter.

Imports rose 0.3% in the second quarter of 2026, after increasing 3.1% the previous quarter. Higher imports of tires, motor vehicle engines and vehicle parts led the overall increase, followed by imports of basic chemicals and computers and computer peripherals. These increases were partially offset by a decline in imports of intermediate metal products, mainly unwrought gold.

Residential investment rallied in the second quarter of 2026, increasing 2.5% following two consecutive quarterly declines. All components of residential investment were up in the second quarter, with ownership transfer costs—which represents resale activity—rising the most in Ontario, Quebec and British Columbia. New construction rose 0.8% in the second quarter led by work put in place for apartments in British Columbia.
Business investment up on higher machinery and equipment as well as engineering structures
Business capital investment was up in the second quarter of 2026 as engineering structures rose 2.3%, following two consecutive quarters of declines. Business investment was also bolstered by higher spending on machinery and equipment, which rose in the second quarter to its highest level since the second quarter of 2024. Investment in computers and computer peripherals rose 16.7% in the second quarter of 2026, mainly on higher imports of processing units, notably the types used in data centres. Businesses also invested more in medium and heavy trucks as well as communication and audio and video equipment.

Household spending up on higher demand for services
Household final consumption expenditure rose 0.8% in the second quarter of 2026, led by higher spending on mutual funds and other investment services, passenger vehicles and rent. Meanwhile, households purchased less gasoline and food in the second quarter, likely in response to higher prices. On a per capita basis, housing spending was up 1.0% in the second quarter.

Gross domestic product deflator records its largest increases in four years on higher export prices
The GDP deflator rose 2.5% in the second quarter of 2026, the largest increase since the second quarter of 2022. Growth in the deflator was led by export prices, which rose 6.5% in the second quarter of 2026 following a substantial rise in international oil prices. Meanwhile, import prices were up 3.2%, resulting in the terms of trade—the difference between the price of exported goods and services and the price of imported goods and services—increasing 3.3%.

Compensation of employees rises
Compensation of employees increased 1.5% in the second quarter of 2026, led by higher wages in finance, real estate and company management and trade. Wages fell in transportation and storage as well as information and cultural industries.

Compensation of employees grew in all provinces and territories in the second quarter of 2026, ranging from 2.5% in New Brunswick to 0.5% in Newfoundland and Labrador.

Corporate incomes rise sharply on higher energy prices
Corporate incomes rose 9.6% in the second quarter of 2026, the largest increase since the first quarter of 2021. The energy sector was the top contributor to the increase in corporate surplus in the second quarter of 2026. Meanwhile, manufacturing industries, which is heavily reliant on energy inputs, recorded lower operating surplus as their costs increased. Among financial corporations, surplus was led by strength in investment dealers and financial investment activity as equity markets strengthened in the quarter.

Household saving rate up as income grows more than spending
The household saving rate reached 3.7% in the second quarter of 2026 as growth in disposable income (+2.1%) outpaced nominal household spending (+1.7%). The household saving rate is aggregated across all income brackets; in general, saving rates are greater in higher income brackets.

Disposable income gains in the second quarter of 2026 were mainly due to increases in wages and salaries and higher transfers from government. The increase in government transfers was mainly due to a one-time GST/HST credit top-up payment provided in June as part of the transition to the Canada Groceries and Essentials Benefit as of July 2026.

Net investment income (termed net property income) was flat in the second quarter of 2026, after falling for three consecutive quarters. Investment income received rose 0.7%, while property income payments were up 1.6%, as interest on both mortgage and consumer credit grew at the fastest pace since the second quarter of 2024 and continued the reversal in the trend of declining interest expenses.

Bottom Line
Today’s data releases are a look in a rear-view mirror, as they predate the latest US-Canadian trade war. New tariffs coming from both Canada and the US will no doubt slow trade between the two countries, weakening economic activity and raising domestic prices on both sides of the border.

The Bank of Canada meets again on September 2, when it will likely hold the overnight policy rate stable at 2.75%.
 

Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Housing Market Activity Picked Up Again in July As New Listings Slowed and Prices Ticked Up For the First Time in Almost Two Years

General Kim Franz 18 Aug

According to data released this morning by the Canadian Real Estate Association (CREA), the Canadian housing market continued to improve in July. Home sales increased month-over-month (m/m) by 0.5%, marking the fourth consecutive monthly gain.

Shaun Cathcart, CREA’s Chief Economist, said, “At the national level, July’s housing data was a carbon copy of the June numbers, with home sales edging up, listings down, and prices remaining stable. The more interesting story over the last few months has been below the surface of the headline national numbers, where markets across the country are generally moving back towards balance. That’s true on the Prairies, in Quebec, and on the East Coast, where most sellers’ markets have been steadily cooling off over the past year. More recently, it’s also been true of the markets in B.C.’s Lower Mainland and Ontario’s Greater Golden Horseshoe, where formerly buyers’ or borderline buyers’ markets have largely shifted back into balanced market territory.”
New Listings

New listings declined by a further 1.6% on a month-over-month basis in July 2026, marking the third drop in a row.

Combined with the small increase in sales recorded in June, the national sales-to-new listings ratio tightened to 51.3% in July. This is converging on the long-term average for the national sales-to-new listings ratio of 54.7%. Readings roughly between 45% and 65% are generally consistent with balanced housing market conditions.

“The ongoing shift towards a more normal balance between supply and demand in so many markets across Canada is good news for buyers, whether that means not having to worry about your new home falling in value, or not feeling pressured to make a decision due to competing offers,” said Garry Bhaura, CREA Chair. “No matter where you are in Canada, more moderate housing market conditions can be expected to continue to bring buyers off the sidelines going forward.”

There were 205,388 properties listed for sale on all Canadian MLS® Systems at the end of July 2026, up just 0.6% from a year earlier and just 1.5% above the long-term average for that time of the year. Overall supply has been sliding sideways and is very close to average levels for over a year now.

There were 4.7 months of inventory nationally at the end of July 2026, the lowest level so far in 2026 and slightly below the long-term average of 5 months. Based on one standard deviation above and below that long-term average, a seller’s market would be below 3.6 months, and a buyer’s market would be above 6.4 months.

With the exception of Saskatchewan, New Brunswick, and Newfoundland and Labrador, which are still borderline sellers’ markets, other provinces have seen their months of inventory converge toward long-term averages in recent months. Notably, even Ontario’s months of inventory measure was only about half a standard deviation above average in July, after being in a buyers’ market for the first four months of this year.
Home Prices

The National Composite MLS® HPI edged up 0.1% from June to July, marking the first increase in the national measure since November 2024.

The non-seasonally adjusted National Composite MLS® HPI was down 3.3% compared to July 2025. Year-over-year declines have been shrinking since January, with the July 2026 reading marking the smallest decrease since October 2025.
Bottom Line

The brief opening of the Strait of Hormuz triggered a sharp decline in oil prices and market-driven interest rates. Alas, the opening was short-lived as the war resumed in spades.

Despite an ongoing trade war with the US, Canada’s largest trading partner, the country’s economy appears to be picking up. The unemployment rate fell to a two-year low last month, and the latest reading on gross domestic product suggests annualized growth rebounded to 3.4% in the second quarter, higher than the central bank’s previous estimate.

While the inflation data for July ticked up a bit, the rise in gasoline prices has not spurred a generalized rise in price pressures. We believe the Bank of Canada will remain on the sidelines once again at its September 2 meeting.

South of the border, however, US long-term Treasury yields have been boosted by the crowding-out effect of the huge corporate bond financing of the AI hyperscalers.

Monday saw the yield on the 30-year US Treasury bond top 5.3% for the first time since the eve of the Global Financial Crisis in 2007, and that’s in line with global experience; Japanese 30-year yields have risen above 4% for the first time in their 27-year history, while equivalent UK gilts yield their highest since 1998. Rising long-term yields have pushed up mortgage rates in the UK, Europe and Japan.

To be sure, some of the upward rate pressure reflects inflation expectations, but three other factors are also at play: the budget deficit outlook; AI-related corporate bond issuance; and the changing Treasury buyer base. With companies issuing huge amounts of debt to fund AI capex, long Treasuries have a new competitor that might force them to offer a stronger yield, while the growing budget deficit never goes away as an issue.

While Canada’s fiscal situation is nowhere near as dire as the American fiscal imbalance, Canada cannot fully sidestep upward pressure on market-driven rates.
 

Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian CPI Inflation Edges Up to 3.0% in July, While Core Inflation Remains Below Its 2% Target

General Kim Franz 18 Aug

The Consumer Price Index (CPI) rose 3.0% y/y in July, following the June gain of 2.8%. The inflation uptick was caused by higher gasoline prices and a rise in the cost of travel tours. Slowing the faster price growth was the deceleration in grocery prices. The all-items CPI excluding gasoline rose 2.2% for the third consecutive month.

Year over year, gasoline prices grew faster in July (+25.7%) than in June (+20.5%). The conflict in the Middle East, including the blockade of the Strait of Hormuz and the partial closure of Red Sea shipping routes in late July, put upward pressure on gasoline prices.

Year over year, prices for travel tours rose faster in July (+15.2%) than in June (+6.8%). Higher prices were driven by more expensive hotels and flights, coinciding with World Cup matches.

Similarly, air transportation prices rose 12.0% year over year in July, following a 9.6% increase in June. Contributing to the price increase were higher jet fuel costs.

The average of the Bank of Canada’s preferred core measures of inflation rose by 1.95%, barely rising from the previous month and remaining below its 2% target.

Prices for food purchased from stores grew more slowly in July (+3.1%) than in June (+3.9%) on a year-over-year basis. Despite the slowdown, July was the 18th consecutive month that grocery price inflation outpaced the all-items CPI.

The year-over-year deceleration in grocery prices was driven by slower price growth for fresh vegetables (+3.9%) and fresh or frozen chicken (+0.3%) as well as lower prices for cereal products (-1.7%). Higher prices for fresh fruit in July (+6.1%) compared with June (+1.7%) moderated the slowdown.

On a monthly basis, price growth for fresh fruit recorded the highest month-over-month movement for the month of July since 2011, at 4.7%. Driving the monthly increase were higher prices for berries and melons.

Year over year, prices rose faster in all provinces in July than in June, except for Ontario.
Year over year, Ontario was unchanged at 2.0% in July compared with June (+2.0%). This was the smallest price increase among the provinces, driven by declines in homeowners’ replacement cost (-4.6%) and natural gas prices (-18.7%).

Nova Scotia had the highest rate of inflation among the provinces at 5.0% in July. Higher prices for electricity (+3.3%) and rent (+8.7%) drove the acceleration.

In New Brunswick, faster price growth was led by higher prices for electricity (+4.4%) and traveler accommodation.

The 12-month change in the Consumer Price Index (CPI) and CPI excluding gasoline
Source: all above data is provided by Statistics Canada

Bottom Line

Today’s inflation report reinforces our view that higher gasoline prices temporarily boost headline inflation while further eroding household purchasing power. However, these energy-driven increases, largely tied to geopolitical tensions, are unlikely to trigger a broader resurgence in underlying inflation. While food and shelter continue to account for a disproportionate share of price growth, inflationary pressures across the economy are generally moderating amid slowing domestic demand.

The duration of the disruption in the Strait of Hormuz remains a key risk. The longer the shipping route remains closed, the longer energy prices are likely to remain elevated. Even so, the June data support our base-case scenario that the Bank of Canada will remain on hold through the remainder of 2026. Policymakers will continue to closely monitor incoming inflation data and stand ready to tighten policy if price pressures broaden and become more persistent. Still, for now, underlying inflation trends remain consistent with a patient, wait-and-see approach.
Written by

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
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