Bank of Canada Holds at 2.25% as Tariff Risks Mount
The Bank of Canada held its target for the overnight rate at 2.25% on Wednesday, September 2, leaving the policy rate where it has sat since the October 2025 cut from 2.50%, and used the accompanying statement to flag a genuinely two-sided outlook: “the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain.” The Bank Rate stands at 2.5% and the deposit rate at 2.20%.
The hold itself was not the story. A Reuters poll of 35 economists in late August found unanimous expectation of a hold at 2.25%, and Montreal Exchange CORRA futures had priced essentially no change, roughly 0.3 basis points, into the announcement. We said as much when we previewed this decision at the start of the week. What was worth reading was the September 2 rate statement itself, because the risks around the rate have shifted since July even though the rate has not.
What changed since July
The clearest new element is trade. “As well, new US tariffs and Canadian counter-measures have been announced following the breakdown of trade talks between Canada and the United States,” the statement reads. “Both situations remain fluid.” The Bank names no sectors, rates or dates, and neither will we. It does, however, spell out the channel it is worried about: “New US tariffs and Canadian counter-tariffs will also raise costs for some businesses and could feed into consumer prices over time.”
The second new element is energy. “The continuing conflict in the Middle East is keeping energy prices high,” the Bank says, and it draws the direct line to its own forecast: “However, with the Middle East conflict still ongoing and little progress reopening the Strait of Hormuz, upside risks to the Bank’s inflation forecast have increased.”
Set against that, the domestic data the Bank describes is not the problem. “As expected, Canadian economic activity strengthened in the second quarter, with GDP up by 3.3%, following very weak growth in the first quarter.” Labour market conditions “have improved in recent months, with the unemployment rate edging down to 6.4% in July,” though the Bank is careful to add that “demand for labour remains subdued and indicators point to continued excess supply in the economy.” Its summary: “Overall, recent data reaffirm Governing Council’s view of a broadening recovery in Canada’s economy. However, uncertainty is high and new US tariffs and threats of further action pose risks to the sustainability of the recovery.”
Inflation tells the same split story. Headline CPI “has been hovering around 3% in recent months, mainly because of persistently higher gasoline prices,” while “excluding gasoline, inflation was 2.2% and measures of core inflation remained close to 2% in July.” A central bank looking only at core would be relaxed. One looking at gasoline, an ongoing Middle East conflict and fresh tariffs on both sides of the border has more to think about.
That is how you get the money paragraph: “With the economy and inflation evolving broadly as forecast in the July MPR, Governing Council agreed to leave the policy rate unchanged. However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain. Governing Council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed.”
Read plainly, that commits the Bank to nothing in either direction. Two of the new ingredients push toward tighter policy and one pushes toward looser, and Governing Council has deliberately left both doors open.
How markets traded through the morning
Canadian equities were modestly higher into midday rather than visibly reacting to a decision this well telegraphed. The S&P/TSX Composite sat at 36,012.87, up 0.52% from Tuesday’s close of 35,825.70, data as of 11:00 am ET. South of the border the S&P 500 was up 0.51% and the Nasdaq up 0.27% on the same snapshot, so the Canadian move was not obviously domestic in origin.
The commodity tape is worth noting because it is the same backdrop the statement describes. WTI crude was at $90.32 USD, up 0.11%, and gold at $4,427.50 USD, up 1.83%, both as of 11:00 am ET. Oil above $90 USD is the mechanism behind the gasoline-driven headline CPI the Bank keeps pointing at.
The divergence question
The interesting context sits outside Canada. Markets have spent the past week pricing the possibility of a Federal Reserve hike in September following Federal Reserve Chair Kevin Warsh’s Jackson Hole speech, which we covered in detail in our piece on what Fed hike bets mean for the Bank of Canada. A Canadian hold while US hike bets build is policy divergence, and the textbook worry about divergence is currency pressure.
So far the statement’s own account cuts the other way. “Financial conditions have tightened since July. Long-term bond yields have moved up globally, including in Canada. The Canadian dollar has appreciated slightly on US-dollar weakness.” Our snapshot agrees: the loonie was at $0.7220 USD, up 0.35% on the prior day, data as of 10:05 am ET.
What it means for Canadian investors
Savers. Nothing in this decision changes the overnight rate, so nothing in it mechanically changes what a high-interest savings account pays. Longer-dated GIC pricing takes its cue from the bond market rather than the policy rate, and the Bank has just told you that long-term yields have moved up globally, including in Canada. That is a mechanism to watch, not a promise that GIC offers improve.
Dividend and rate-sensitive equities. The 2.25% hold was fully priced, so it is not the variable that matters here. The long end the statement flags is the one worth tracking for income equities and REITs, whose valuations are most exposed to what happens beyond the front of the curve. If you are working out which Canadian income names belong in that part of a portfolio, our Canadian dividend stocks coverage is where we keep that analysis.
Cross-border holdings. A firmer loonie trims the Canadian-dollar value of returns on US-dollar assets, which is the quiet cost of the currency move the Bank describes.
What to watch next
The next scheduled announcement is October 28, 2026, released alongside the next Monetary Policy Report, which means fresh forecasts rather than a statement alone. Before that, Friday’s August Labour Force Survey lands at 8:30 am ET on September 4 and speaks directly to the “continued excess supply” line. Whether the Fed moves in September will decide how real the divergence question becomes. And the tariff situation is one the Bank itself calls fluid, which is another way of saying the inputs to the October decision are not settled.
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