Trade tensions outweigh other factors as the Bank of Canada holds interest rates again

September 2, 2026

Wesley Blight

The Bank of Canada (BoC) decided to hold its policy interest rate at 2.25%, marking the seventh consecutive BoC monetary policy meeting where rates were left unchanged. The decision was widely anticipated as escalating trade tensions with the U.S. have begun to cloud Canada’s economic outlook. The potential damage to the economy resulting from the breakdown in trade negotiations outweighed news of a recovering economy and higher headline inflation as the Bank made its decision.

Following weak growth in the first quarter, the Canadian economy strengthened in the second quarter, up 3.3%. From the Bank’s September statement, “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.”

Consumer price index inflation remains elevated, hovering around 3%, mainly due to higher gas prices. According to the Bank, “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.”

While the economy and inflation are moving broadly in-line with the Bank’s July projections, risks of higher inflation have increased, and economic growth prospects have become more uncertain. New U.S. tariffs, Canadian counter-tariffs and further escalation pose a risk to the ongoing recovery. Prices may increase for businesses and consumers over time, putting upward pressure on inflation. Similarly, oil prices remain elevated as conflict in the Middle East rages on without signs of resolution. “The longer that oil prices and elevated refinery margins persist, the greater the risk of spillover to the prices of other goods and services,” said the Bank.

Given these developments, we remain convinced that the BoC will hold interest rates steady over the near term.

The strategic asset allocation of our clients' portfolios remains unchanged. We continue to focus on the long-term, building around long-term goals, long-term time horizons and long-term capital market expectations, which remain little changed. In client portfolios that include a tactical asset allocation component, over the next 12-to-18 months, where opportunities and risks are a bit clearer, we continue to be tactically overweight equities relative to fixed income and cash.

The current environment, where uncertainty is elevated and various forces are influencing economic and market outcomes, reinforces the value of professional portfolio management. Diversification across multiple asset classes, regions, styles and sectors remains as important as ever. As always, we will continue to monitor and assess economic developments, policy decisions and market conditions as they evolve.

The next BoC interest rate announcement is scheduled for October 28^th and will be accompanied by an updated Monetary Policy Report. 

Wesley Blight, CFA, CIM, FCSI, is Vice President and Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. He is responsible for private asset and multi-asset portfolio solutions.