Bank of Canada Prepares to Adjust Rates Amid Tariff and Energy Price Uncertainty

Bank of Canada Governor Tiff Macklem warned that rising tariffs and energy prices could lead to a significant slowdown in economic growth, potentially cutting it in half. The Canadian economy entered the summer with optimism, but this view has since fallen, according to Macklem.

The non-energy exports rose by 14.5% on an annualized basis in the second quarter of 2026, their highest level since early 2025. Business investment also increased by 8.8% over the same period. However, companies are now facing headwinds due to US tariffs, which could reduce Canada's exports to the US by around 5%.

Macklem stated that if tariffs remain at their current level, he estimates that gross fourth-quarter GDP growth could be cut in half to below 1%. Rising oil prices, driven by the war in the Middle East, are also casting a pall over the Canadian economy. This is causing consumer price index inflation to hold near 3% for several months.

Economists were divided on what this means for future interest rates. Some, like Royce Mendes from Desjardins Group, believe the bank may lay groundwork for a rate increase if energy prices remain high. However, others, such as Douglas Porter from BMO Capital Markets, think that unresolved CUSMA uncertainty and a weak economy make an increase 'a very long shot indeed.'

Macklem emphasized that monetary policy has limits and cannot offset tariff effects or control global energy prices.