The Bank of Canada will make its latest interest rate decision Wednesday morning with policymakers facing a Canadian economy that suddenly looks stronger than it did a few months ago, but also a new round of risks from trade and global energy prices.
The central bank held its overnight rate at 2.25% in July, when it predicted the economy would strengthen following a weak start to the year. The rebound has turned out to be stronger than expected. Statistics Canada reported last week that the economy grew at an annualized rate of 3.3% during the second quarter, its fastest pace since 2023.
That growth would normally reduce pressure on the Bank of Canada to lower interest rates. The situation is more complicated this time because Canada is simultaneously dealing with an escalating trade dispute with the United States and renewed inflation risks from higher energy prices.
Oil prices have risen sharply amid renewed fighting between the United States and Iran. Higher energy costs can filter through the economy by raising transportation, manufacturing and shipping expenses, making the Bank’s inflation fight more difficult even if economic growth eventually slows.
The Canadian dollar has also been moving in response to those developments. It rebounded from a two-week low on August 31, helped by higher oil prices and month-end investment flows, but remained near 72 U.S. cents. Currency movements matter because a weaker Canadian dollar makes imported goods more expensive.
Trade presents a different problem. Canada announced retaliatory tariffs after negotiations with Washington broke down in August. Those measures will take effect September 8 and apply to $27.6 billion worth of U.S. imports, including steel, dairy products, appliances, agricultural equipment and electronics.
Tariffs can simultaneously slow growth and increase prices, which creates an uncomfortable situation for central banks. Lowering interest rates can support businesses and consumers when the economy weakens, but cheaper borrowing can also add to inflationary pressure.
Recent economic data provide reasons for optimism. Canada’s manufacturing sector expanded for a fifth consecutive month in August, according to the S&P Global purchasing managers’ index. Output and employment increased even as manufacturers became more concerned about the renewed trade tensions.
The labour market has also improved. Employment increased by 75,000 in July and the unemployment rate edged down to 6.4%, with gains in retail, finance, professional services and construction.
For businesses and investors, Wednesday’s decision will therefore be about more than whether the Bank changes one number. The explanation accompanying the announcement will provide important clues about which risks policymakers consider most serious.
The Bank of Canada entered the summer expecting modest improvement in the economy. It now faces stronger growth alongside a rapidly changing trade environment and another potential source of inflation from global energy markets.
That makes the September decision one of the more complicated calls the Bank has faced this year.
