Here it is again, with an additional set of observations: our latest estimates of what the state of the economy was in each quarter (Chart 3). The point of this chart is to show that there is always uncertainty about the state of the economy and that our assessments of it evolve as we receive more information.
Similarly, we often can’t know at the outset how big or long-lasting the inflationary impact of a supply shock will be. And unless we’re sure the effects will be short-lived, the policy response should be larger than when we can be sure.
Another challenge is determining how much of a change in economic conditions is being driven by temporary shocks versus structural change.
The ongoing shifts in the trade environment are an example. A consequence of US tariffs is that Canadian exports are roughly 5% lower than before President Trump was re-elected in 2024. This decline in exports has weakened the economy. Meanwhile, uncertainty about the future of our trade arrangements is making it hard for Canadian businesses to plan, so some investment is being delayed. The challenge for central bankers is determining how much of the weakness in activity reflects lost efficiency associated with structural change, and how much points to a shock with persistent but ultimately transitory impacts. The policy response should depend on this breakdown.
What we’re doing at the Bank
I’ve laid out some considerations and challenges we face when supply-side developments are important for inflation. Now I’ll talk about three ways we are working to better understand and diagnose supply-side developments and to manage the risks inherent in trade-offs.
Model development and scenario analysis
First, we have been developing multi-sector models that enhance our lens into the supply side of the economy.
These new models allow us to explore how shocks are transmitted through supply chains and to assess how they could affect the economy and inflation. The models also place added emphasis on how businesses set prices, including when the inflationary effects of a large shock are amplified.
In addition, we’ve been using scenario analysis to help us think through how policy could, and should, respond to different shocks. As I’ve mentioned, the response will depend on the size of a shock and how long its effects might last, among other things.
Scenarios also help us analyze the policy implications of different mixes of shocks, and of situations where the impact on inflation is amplified. And they can help us see in the “dark corners”—situations where outcomes could be particularly dire and that we might overlook if we’re too focused on our base case projection.
In 2025, we assessed the impacts of different tariff scenarios on the Canadian economy, and we published them in our Monetary Policy Reports to help the public understand our thinking.
Overall, using scenarios helps us assess and balance risks in setting policy. As former Governor Poloz said, we need to identify the most important risks and uncertainties, think about the consequences of a policy error, and then choose a policy course that balances those risks and uncertainties.
Intelligence gathering
Second, intelligence gathering is crucial. Determining when to pivot—from looking through an increase in inflation to tightening policy—requires more than just macroeconomic data and aggregate models that use those data.
We have increased our outreach—we meet with business leaders, civil society groups and students where they live, work and study. We listen. We ask questions. We learn. And we exchange views. This helps us better understand how households and businesses are experiencing developments in the economy.
A greater use of non-traditional data can help us see what is happening under the surface, and in a timelier way. Some examples are credit and debit card transactions, retail payments, and passenger and freight traffic at the Canada–United States border.
And our business surveys can help us determine when businesses are facing supply shocks. They can also help us assess how persistent the impacts of the shocks may be. The Business Leaders’ Pulse has been an invaluable survey for tracking shifts in expectations about how long trade tensions could last and how those shifts affect firms’ willingness to pass higher costs on to their customers.
Overall, intelligence gathering helps us spot trends before they show up in the data, and it can give us more detailed insights. This is particularly helpful in uncertain and rapidly changing situations.
Communication that is transparent and also clear
Last but certainly not least, I want to talk about the importance of transparency and clear communication. These are critical for building public trust and confidence in the work that we do. This is even more important in a world where we face trade-offs for monetary policy more frequently.
As I’ve outlined, in quadrant A, we might tighten policy, we might ease policy, or we might do nothing. Whatever we do, Canadians will want to understand why.
We’ve known for years that monetary policy works best when people understand our actions and our thinking. Recent research bears this out, underscoring the important role that communication plays in keeping inflation expectations well anchored. In particular, making sure our communication is clear, by using broadly accessible language, improves people’s understanding of our message—whether or not they have related technical backgrounds. Research also suggests that effective communication is even more valuable when inflation is elevated, or uncertainty about the policy outlook is high.
So, given that we may need to use the flexibility in our framework more often, we must commit to communicating what we know, what we don’t know and how we are interpreting developments. We must clearly outline the areas of uncertainty we are watching closely and explain why and how we are watching them. And we must clearly describe for Canadians what our latest analysis could mean for the economic outlook and, when possible, for the near-term path of monetary policy.
