Wednesday 2 September 2026

The Bank of Canada’s next move is more likely to be a hike than a cut, but we do not expect it at the October 28 meeting unless core inflationCore inflation Inflation with the most volatile prices, mainly energy and fresh food, stripped out, so the underlying trend shows. The Bank of Canada watches this more closely than the headline number. has clearly moved off 2%. Until then, expect a hold with a hawkish edge.

Why we think so. The evidence is in the Bank’s own statement. For a year its language was about when cutting would resume. On Wednesday it described the condition that would make it raise rates instead: oil prices and refinery margins staying high long enough to spill over into persistent inflation. Central banks rarely spell out a risk in that detail unless they want it taken seriously. The backdrop supports the shift. The economy grew 3.3% annualized in the second quarter, faster than it can run for long without pressure on prices, and unemployment edged down to 6.4%, so the labour market no longer argues for easing. Yet headline inflation near 3% is mostly gasoline, and inflation excluding gasoline was 2.2% in July, close to target. Hence patience rather than action: no case for a cut, but no proof yet that the energy shock is spreading. The Bank also said monetary policy cannot offset tariffs or global energy prices, which rules out a cut to cushion the trade war.

The bigger picture. Central banks usually look through a supply shock such as an oil spike, because higher interest rates do not produce more oil. They stop looking through it when the shock changes behaviour: when businesses build higher costs into prices across the board and workers bargain for wages to match. Wednesday’s statement describes that tipping point and promises to act if it is crossed. Holding now and hiking later is the textbook sequence when a central bank suspects a supply shock is broadening but wants evidence first.

What it means. For a variable-rate mortgage, a line of credit or a business operating loan, nothing changes today, because prime follows the policy rate. What should change is the planning assumption, from “a cut is coming” to “rates hold, with some risk of an increase”. A renewal or loan review before year end is best priced on today’s rates, with any cut treated as a bonus. Savers can expect GIC and savings rates to stay near current levels. Business owners should take the Bank at its word that it will not cushion tariffs, and any buy-sell or key-person arrangement funded with debt is worth checking for how its financing reprices.

What would change our mind. CPI ex-gasolineCPI ex-gasoline The Consumer Price Index with gasoline removed. When it sits well below the headline rate, the inflation is coming from fuel rather than from the broad economy. at or below 2.2% in both the August and September reports, or a ceasefire that takes oil back under US$80. Either would show that the energy shock is not spreading and the case for a hike would fade. In the other direction, a clear move in core inflation away from 2% before October 28 would bring a hike forward to that meeting.

What to watch. Thursday’s Canadian labour productivity figures for the second quarter (consensus +0.7%), Friday’s August jobs report (consensus +15,000 jobs and unemployment at 6.4%), then the August and September CPI reports ahead of the October 28 decision.

We expect the TSX’s day-to-day direction this month to be set by oil and gold rather than by anything the Bank of Canada does. A diversified Canadian equity holding is, whether its owner intends it or not, a commodities position.

Why we think so. Wednesday’s numbers show it. The S&P/TSX Composite rose 108.70 points, or 0.3%, to 35,934.43, recovering only part of Tuesday’s 445-point fall. Bank shares rose between 0.5% and 1% after the rate hold, a sensible response: a steady policy rate and a growing economy is the environment in which banks earn best, because lending margins hold while loan losses stay contained. But gold miners gained 2.5% to 4% as the gold price recovered from Tuesday’s drop, several times the banks’ move. The rate decision was largely expected; the swings in gold and oil were not. With Gulf tensions moving crude and gold by large amounts from one session to the next, the resource half of the index will keep overpowering the steadier influence of interest rates.

The bigger picture. The Canadian market is concentrated in a few sectors: financials, energy and materials make up a large share of the index. An investor who buys a broad Canadian index fund for diversification is therefore buying a portfolio that rises and falls with commodity prices and with the fortunes of a handful of large banks. That is not a flaw, it is a feature of the economy the index reflects, but it means Canadian equities behave differently from broader global indexes, which carry far more technology, health care and consumer businesses. Over a full cycle that concentration can help, as it does when oil is strong, and hurt, as it does when commodities fall together.

What it means. For investors whose portfolio is mostly Canadian shares, the useful exercise is to know how much sits in energy, materials and the six largest banks. It is usually more than people expect, especially once index funds and balanced funds are counted. Spreading equity holdings across sectors and regions is the standard way to reduce that dependence. Business owners whose own company is tied to resources, or to lending conditions, should recognise that a Canadian-heavy portfolio doubles that exposure rather than offsetting it. For borrowers, strong bank results are not a signal that credit is getting cheaper; they reflect a steady rate environment, not a falling one.

What would change our mind. A sustained stretch in which the TSX rises while oil and gold both fall, or a jobs report that moves bank shares further than commodity prices move the miners. Either would tell us domestic economic news had taken back the lead from commodities, and we would say so.

What to watch. The price of oil and gold as Gulf developments unfold, Friday’s Canadian and U.S. jobs reports for August, and Monday’s start of Canada’s counter-tariffs on U.S. goods.

We think this round of counter-tariffs lasts longer than the spring rounds did. Plan on the tariffs being in place through the winter.

Why we think so. Two features set this round apart. First, both governments have matched each other at the 50% level, which leaves little room for either to escalate further and makes standing down look like a concession. Second, neither side has a scheduled off-ramp: there is no announced negotiation, review date or expiry. Canada’s counter-tariffs of 15%, 25% and 50% cover $27.6 billion of U.S. products, including steel, dairy, appliances, agricultural equipment, pulp and paper, electronics and textiles, and take effect at 12:01 a.m. on Monday 8 September. The Bank of Canada described the trade situation as fluid on Wednesday, which is a polite way of saying no one can see the end of it. When neither side has a timetable for removal, the sensible default is that the measures stay.

The bigger picture. A tariff is a tax paid by the buyer in the country that imposes it. Canadian businesses importing these U.S. goods will pay the duty and then decide how much to pass on to their own customers. That is why tariffs tend to raise prices at home as well as abroad, and why the Bank of Canada has said monetary policy cannot offset them: lower interest rates would not reduce the duty, they would simply add to inflation. Once two governments have retaliated at the same level, removing the measures usually requires a broader agreement rather than a single gesture, which takes time.

What it means. For a business that buys equipment, inputs or inventory from the United States in these categories, the landed cost changes on Monday. Goods already in transit are exempt, so an order that ships this week can arrive tariff-free, while the same order next week may not. The practical step is to check the tariff list against your top twenty U.S. suppliers before Monday and decide which orders to bring forward, which to source elsewhere and which price increases to plan for. A tariff-driven cost shock is also what a corporate cash buffer is for: a business with liquidity can absorb a few months of higher costs while it adjusts, rather than borrowing at short notice. Households should expect higher prices on some appliances, electronics and textiles over the coming months, and borrowers should not expect the Bank to cut rates to soften the blow.

What would change our mind. An announced negotiation with a timetable, or the removal of the 50% measures by either government, before the winter. Either would make a shorter round likely and we would revise the planning horizon.

What to watch. Monday 8 September, when the counter-tariffs take effect, Thursday’s Canadian merchandise trade balance for July (consensus +$3.2 billion), and the Bank of Canada’s October 28 decision for any change in how it describes the trade situation.