Bank of Canada: Policy Rate Holds at 2.25% in September 2026

• The Bank of Canada held its target for the overnight rate at 2.25% on September 2, 2026, keeping the Bank Rate at 2.5% and the deposit rate at 2.20%.
• Canada's economy saw a broad-based strengthening in the second quarter, with GDP growing by 3.3%, and the unemployment rate decreasing to 6.4% in July.
• CPI inflation has hovered around 3% recently, primarily due to high gasoline prices, though core inflation measures remained near 2% in July.
• Ongoing Middle East conflict and new US and Canadian tariffs have increased upside risks to the Bank's inflation forecast and introduced greater uncertainty for economic growth.
• The Governing Council is prepared to adjust monetary policy as needed, with the next interest rate decision scheduled for October 28, 2026.

Despite maintaining its key interest rate, the Bank of Canada acknowledged heightened upside risks to inflation and increased uncertainty regarding growth prospects, particularly due to new tariff measures.

On September 2, 2026, the Bank of Canada announced its decision to keep its target for the overnight rate steady at 2.25%. This move also maintains the Bank Rate at 2.5% and the deposit rate at 2.20%. The decision comes as the Canadian economy demonstrated a notable strengthening in the second quarter, with Gross Domestic Product (GDP) expanding by 3.3% following a period of very weak growth in the first quarter.

This recent economic uplift was broad-based, encompassing solid gains in consumption, a rebound in housing activity after several subdued quarters, and sharp increases in both exports and business investment. Furthermore, the labor market has shown improvement in recent months, with the unemployment rate edging down to 6.4% in July. Despite these positive indicators, demand for labor remains subdued, and data continues to suggest an excess supply within the economy. Overall, the Governing Council views the latest economic data as affirming a broadening recovery across Canada.

Despite the signs of domestic recovery, the Bank of Canada highlighted significant inflationary pressures and global uncertainties. Consumer Price Index (CPI) inflation has consistently hovered around 3% in recent months, primarily driven by persistently high gasoline prices. However, the Bank noted that there has been limited evidence of these elevated energy costs spreading to other components of inflation, with inflation excluding gasoline at 2.2% and core inflation measures remaining close to 2% in July.

Nevertheless, the ongoing conflict in the Middle East continues to keep energy prices high, with little progress reported in reopening the Strait of Hormuz. This situation, coupled with elevated margins for refined energy products, has increased the upside risks to the Bank's inflation forecast. The longer these conditions persist, the greater the potential for price increases to spill over into other goods and services. Additionally, new tariffs imposed by the United States and Canada's retaliatory counter-measures, following a breakdown in trade talks, are expected to raise costs for certain businesses and could eventually contribute to higher consumer prices.

The global economic landscape also presents a mixed picture. While the United States continues to experience solid economic growth, fueled by consumer spending and investments in artificial intelligence, and the euro area saw stronger-than-expected growth in the second quarter, China's economy has slowed. Despite these regional variations, the global economy has generally shown resilience against geopolitical challenges, with overall growth largely aligning with projections from the July Monetary Policy Report. However, financial conditions have tightened globally since July, with long-term bond yields rising, including in Canada, though the Canadian dollar has appreciated slightly due to US-dollar weakness.

The Governing Council's decision to maintain the policy rate reflects its assessment that the economy and inflation are evolving broadly as anticipated in the July Monetary Policy Report. However, the central bank underscored that uncertainty is high, and the new US tariffs, along with threats of further action, pose considerable risks to the sustainability of the economic recovery. The increased upside risks to inflation, combined with the new tariffs, also contribute to greater uncertainty regarding future growth prospects.

Despite maintaining its key interest rate, the Bank of Canada acknowledged heightened upside risks to inflation and increased uncertainty regarding growth prospects, particularly due to new tariff measures. The Governing Council affirmed its commitment to closely monitoring the durability of the economic rebound and the inflation outlook. It remains prepared to adjust Canadian monetary policy as necessary to fulfill its mandate of maintaining confidence in price stability during this period of global upheaval. The next scheduled announcement for the overnight rate target is set for October 28, 2026, coinciding with the release of the Bank's next Monetary Policy Report. Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers are slated to hold a press conference around 10:30 AM ET on that date to discuss the Governing Council's deliberations.

Lawyers and compliance officers should note the Bank of Canada's maintained policy rate but be aware of the increased inflation risks and economic uncertainty highlighted. This impacts client advice on financing costs, M&A valuations, and trade-related compliance due to potential future rate adjustments and tariff-driven cost increases for Canadian businesses.

Source: Original reporting via Bank of Canada