Bank of Canada holds key rate at 2.25% as tariffs, Iran war cloud outlook

A man checks his phone as he walks past the Bank of Canada building in Ottawa, Wednesday, July 15, 2026. THE CANADIAN PRESS/Adrian Wyld – The Canadian Press

OTTAWA — The Bank of Canada held its benchmark interest rate steady again on Wednesday as new U.S. tariffs and the ongoing war in Iran cloud the central bank’s outlook.

The Bank of Canada’s policy rate remains at 2.25 per cent after a seventh straight hold. The move was widely expected by economists.

Bank of Canada governor Tiff Macklem said Wednesday that the persistence of the Middle East conflict has increased inflationary risks as global energy prices continue to float higher.

A new tariff battle with the United States meanwhile threatens Canada’s burgeoning economic rebound, he said. That renewed uncertainty might lead businesses to delay investment and hiring decisions until the trade picture crystallizes.

Because the economy was evolving broadly in line with the bank’s forecasts, governing council opted to keep the policy rate unchanged on Wednesday, Macklem said.

“Monetary policy cannot offset the effects of tariffs or influence global energy prices. What we can do is ensure global developments don’t jeopardize price stability in Canada,” he said.

Monetary policymakers at the Bank of Canada use the policy rate to keep a lid on inflation and support economic growth when prices are contained.

Macklem was tight-lipped in a press conference with reporters after the decision about whether the bank is more concerned about inflation or growth risks in the midst of an uncertain outlook.

“The risks are shifting and we are prepared to adjust monetary policy as needed,” he said.

Inflation was a full percentage point above the Bank of Canada’s two per cent target at three per cent in July. The Iran war drove a volatile period for gas prices over the spring and summer.

Macklem said that’s too high for the bank’s comfort. He said its rate decisions are still guided by its inflation forecast, which will be updated at the next rate announcement on Oct. 28.

Economic growth, meanwhile, has shown signs of rebounding after stagnating for much of the last year. The economy surged with 3.3 per cent annualized growth in the second quarter, though few analysts expect that same pace continued into the current quarter.

The spectre of a re-escalating trade war with the United States loomed over the Bank of Canada’s decision Wednesday.

The United States imposed 50 per cent tariffs on a range of Canadian goods on Aug. 22 and has threatened steeper duties on autos.

Macklem said the central bank doesn’t expect a “large direct impact” on the economy from the newest tariffs, though targeted sectors could be hit hard. He said he expects growth in the fourth quarter will take a hit from the new duties.

Canada is planning a slate of retaliatory tariffs on U.S. goods starting Sept. 8. Macklem said the inflationary risks from Canada’s counter-tariffs are “fairly modest” and that the global energy shock remains the biggest tailwind to higher prices.

Before the latest U.S. tariffs came into effect, exports were starting to rise again. While Macklem warned that new trade restrictions could see business confidence hampered again, he also expressed some optimism about firms’ ability to cope with an uncertain status quo.

“Businesses have been adapting to an environment with more uncertainty, higher tariffs … they’re finding ways to do business,” Macklem said.

“That has put the Canadian economy on a better footing going into this latest new wave of U.S. tariffs,” he said.

Macklem also reiterated that most of the things that will insulate the economy from tariff threats — like diversifying Canadian exports to new markets — are not in the Bank of Canada’s purview. Much of that work needs to be done by governments and the private sector, he said.

Some economists weighing in after the rate decision Wednesday argued that Macklem’s focus on rising inflationary risks in his statement gives the Bank of Canada a bias toward rate hikes, rather than cuts.

Stephen Brown, chief North America economist at Capital Economics, said in a note to clients that the central bank will likely need to see further signs of improvement in the unemployment rate or economic growth before raising the policy rate.

But given that global oil prices have shown little signs of easing, he said a rate hike at the bank’s final meeting of the year in December is now on the table.

KPMG chief economist Ali Jaffery said in a note that he expects the bank to be less worried about inflation given the sharp risks for lower growth in the face of escalating tariffs. His call remains for the Bank of Canada to stay on hold through the end of 2027.

CIBC chief economist Avery Shenfeld said it was no surprise the central bank left its key rate unchanged “amidst the fog of a trade war.”

Shenfeld said CIBC sees “little prospect” for any change in the policy rate this year, given that both the U.S. tariff and Iran war fronts could shift in the months ahead.

Financial markets had three quarter-point hikes baked into their forecasts by mid-2027 as of Wednesday at noon, according to LSEG Data & Analytics.

Odds of a hold at the Bank of Canada’s next decision in October stood at more than 94 per cent.

This report by The Canadian Press was first published Sept. 2, 2026.

Craig Lord, The Canadian Press

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