Considerations for monetary policy
Governing Council members turned their attention to the risks and uncertainties facing the Canadian economy and the outlook for inflation.
First, members discussed the effects of ongoing trade uncertainty on the Canadian economy. While near-term uncertainty around US tariffs had diminished, uncertainty around the renegotiation of the Canada–United States–Mexico Agreement (CUSMA) was coming into greater focus. This was likely to impede a recovery in business investment in the near term. In addition, the growing use of US tariffs as an instrument of geopolitical pressure on other countries was keeping global uncertainty elevated.
Members discussed whether the recent strength in household spending would continue, given the softening of the labour market and low consumer confidence. Consumption per person returned to the level seen prior to the COVID-19 pandemic after an extended contraction that had ended in 2024. Past cuts to the policy interest rate may have been a contributing factor. Members agreed that consumption should continue to support growth going forward. Overall, the economy was expected to grow modestly, roughly in line with the current tariff scenario outlined in the July Report.
Members continued their discussion from the July meeting about the appropriate role for monetary policy in the context of a shock that affects both demand and supply.
The shift in US trade policy was clearly affecting demand for Canadian goods and services. Economic growth could slow further while the adjustment in business investment and jobs plays out. However, the Council also recognized that this weakness reflects an economy adapting to a large structural change—many sectors are adjusting to the new global trading environment. Monetary policy is not well suited to structural shocks.
Given the uncertainty surrounding the impact of these structural changes on demand and supply, members acknowledged it was particularly difficult to assess the amount of slack in the economy. The outlook for inflation was therefore subject to greater uncertainty than usual. At the same time, slowing population growth in Canada will continue to weigh on potential growth. As a result, members agreed that they would need to proceed carefully in adjusting the stance of monetary policy.
Members recognized that, based on recent government statements, federal and provincial investment in infrastructure and support for sectors and workers affected by tariffs would be likely greater than in the July Report scenarios. As usual, once federal and provincial spending plans are tabled, Governing Council would review the overall macroeconomic impact and incorporate it into their outlook.
With respect to inflation, members agreed that the upside risks to inflation had diminished. Upward momentum in underlying inflation appeared to have turned. Also, most counter-tariffs on US goods had been removed. This meant there was no longer a significant risk that the cost of tariffs would be passed on to Canadian consumers and create a knock-on effect to other prices. Lower input costs from labour, shipping and materials would also likely mean lower inflationary pressures going forward.
Members stressed that while the upside risks had diminished, they had not gone away. Trade disruptions implied new costs. How big these costs would be, when and where they might materialize, and what they could mean for inflation all remained uncertain. The reconfiguration of Canada’s trading architecture meant the economy would be working less efficiently, adding costs. Also, tariffs on imports into the United States could spill over into greater price pressures in Canada, given that many goods from other countries transit through the United States before arriving in Canada.
Overall, Governing Council members agreed that the Canadian economy had weakened in the face of trade disruptions, while the upside risks to inflation had diminished.
