Markets expect the Bank of Canada to raise rates on Wednesday for the first time in a year, two days before Washington rewrites its 50 percent tariff annexes. Governor Tiff Macklem says he does not expect a return to the old trading relationship, and exporters are being asked to plan on that basis.
OTTAWA, Monday, October 26, 2026
OTTAWA, Oct. 26, 2026 – The Bank of Canada will announce its interest rate decision on Wednesday against the most difficult backdrop any Canadian central banker has faced in a generation, with inflation above the target range on an energy shock, employment falling for a second consecutive month, and an export sector absorbing American tariffs that Governor Tiff Macklem has indicated he does not expect to disappear.
Markets have moved decisively toward a quarter point increase to 2.50 percent from the current 2.25 percent, which would be the first increase in a year. Overnight index swaps imply roughly an 80 percent probability of a move, and a Reuters poll published on October 23 found most economists expecting a hike on Wednesday and a further increase by the end of March. Bloomberg reported the same week that economists see the Governor largely ensnared by market pricing.
The decision lands 48 hours before the second scope change this autumn to Washington’s 50 percent Section 338 tariff takes effect on Canadian goods, and on the same morning that American goods trade balance data is released. For Canadian exporters and the firms that finance them, the week is a compressed test of whether the policy framework and the trade framework are still pointing in the same direction.
Macklem said in remarks reported on October 26 that while he hopes for a more normal relationship with the United States, he does not expect a return to the previous trading environment under a protectionist American administration. That sentence is the most consequential thing a Canadian official has said this month, and it is considerably more important to a Canadian exporter’s five year plan than 25 basis points.
The uncomfortable arithmetic
The Bank is being pulled in two directions by forces that originate outside its control.
On the inflation side, September consumer price inflation rose to 3.1 percent, above the upper bound of the Bank’s 1 to 3 percent target range. Much of the increase reflects energy. Brent crude briefly topped 117 dollars a barrel this month amid the conflict involving Iran, and transportation costs in Canada have risen sharply. Tariffs have added their own increment. Analysis published on October 24 found prices for tariff affected goods rising about 6 percentage points more than comparable untaxed products.
A central bank can look through a supply shock if expectations stay anchored. The Bank’s own business outlook survey indicates firms’ inflation expectations are rising, which is the condition under which looking through becomes dangerous. Macklem has signalled that inflation forecasts will likely be revised higher in the Monetary Policy Report published alongside Wednesday’s decision.
On the activity side, the picture argues the other way. Canada entered a technical recession earlier this year after two consecutive quarters of contraction, with first quarter gross domestic product falling 0.1 percent on an annualised basis. Growth subsequently recovered, with second quarter output rising 3.3 percent and third quarter growth running near 2 percent, but the labour market has turned. Employment fell by 68,300 in September, a second consecutive monthly decline. Unemployment is edging higher. Wage growth has slowed to about 2.3 percent year over year, which is not the profile of an economy generating a wage price spiral.
Reuters poll medians point to growth of 1.0 percent in 2026 and 1.7 percent in 2027. Macklem warned in September that the latest American tariffs could halve Canada’s fourth quarter growth.
Raising rates into falling employment, slowing wages and a tariff shock is not a textbook decision. It is a decision about credibility, and the Bank appears to have concluded that the cost of letting an energy driven overshoot become embedded exceeds the cost of tightening into weakness.
What tariffs have done to the export base
The trade damage underlying this decision has accumulated over more than a year and is now visible in sector level data rather than in forecasts.
Canadian steel exports to the United States have fallen by roughly half since the duties took effect. Stelco cited a 58 percent plunge in its American steel exports, alongside foreign import pressure, when it defended layoffs earlier this month. Canadian steelmakers have partially offset the loss through domestic demand, supported by Ottawa’s steel import quota regime and the extension of steel and aluminum measures, but partial offset is not replacement.
Lumber exports were running about 20 percent below 2024 levels earlier this year on Bank of Canada figures. Canadian softwood lumber faces a combined antidumping and countervailing duty rate reset in mid October to 24.75 percent, down from previous levels but still substantial, stacked on the Section 232 timber and lumber tariff introduced in October 2025. Ontario ministers called the duties unjustified following the Commerce Department decision and demanded their removal in full.
Canadian auto exports to the United States are down more than 10 percent. Cleveland-Cliffs confirmed layoffs at its Hamilton, Ontario plant on October 21, the same day the federal and Ontario governments announced a 6.2 billion dollar industrial support package, of which 3.7 billion dollars is directed to steelmakers and 1.8 billion dollars to automakers over five years, with Ottawa providing 1.1 billion dollars of the auto component.
Roughly 70 percent of Canadian exports go to the United States. That concentration is why a bilateral tariff dispute reads directly into national output, and why the Bank of Canada devoted an in focus section of its April Monetary Policy Report to assessing one year of American trade restrictions on Canadian industries.
The front loading distortion
One feature of the recent data deserves particular caution from anyone reading Wednesday’s decision as a verdict on export health.
Canada’s merchandise trade surplus widened substantially in August, reaching 4.2 billion dollars, with the surplus with the United States reported at 11.2 billion dollars. The widening was not a sign of competitive strength. Exporters rushed shipments across the border ahead of tariff effective dates, pulling future sales into the present.
Front loading of this kind flatters the data twice. It inflates the quarter in which it occurs and then depresses the quarter that follows, as the pulled forward demand is absent. With the Section 338 list changing again on October 30, and with the September 15 modification having already added 122 classifications, the incentive to accelerate entries has been recurring rather than one off. Fourth quarter trade data should be read with that distortion in mind, and firms building forecasts off recent export volumes risk extrapolating an artifact.
The Bank is aware of this. The October 24 observation from analysts that exports have held up despite trade tensions is accurate as a description of the data and misleading as a description of the underlying position.
What Macklem’s statement actually means
The Governor’s remark that he does not expect a return to the previous trading environment is a structural judgement rather than a forecast, and it carries three implications for Canadian business.
The first concerns the capital stock. Investment decisions in tariff exposed manufacturing have been made for four decades on the assumption of duty free continental access. More than 99 percent of United States and Canada trade moved duty free before 2025. If that assumption no longer holds, a share of the existing Canadian industrial capital stock is mispriced, because it was located, sized and specified for a market that now carries a 50 percent charge at the border. The Bank’s business surveys already show firms worried about the effect of tariffs on investment and hiring.
The second concerns the exchange rate. A persistently more protected American market implies a structurally weaker Canadian dollar than the pre 2025 relationship would have supported, because the terms of trade have deteriorated. Analysis published on October 26 suggests a hike paired with higher inflation forecasts and openness to a further move by March could push the United States dollar against the Canadian dollar below 1.4000, toward the 200 day moving average near 1.3880, while a cautious message could allow a rebound toward 1.4100 and potentially the 18 month high near 1.4230. Those are tactical ranges within a structurally altered relationship.
The third concerns policy sequencing. If tariffs are a permanent feature rather than a shock to be ridden out, then monetary policy cannot be the primary instrument of adjustment. The adjustment has to come through fiscal support, trade diversification and industrial restructuring, which is precisely the mix Ottawa and Queen’s Park chose on October 21. Carney has set a target of doubling Canadian exports to non United States markets within a decade.
The diversification question
Export diversification is the right answer and a slow one, and the Canada and China relationship illustrates both halves of that proposition.
The two countries reached a tariff quota arrangement in January covering electric vehicles and canola, easing measures that had constrained Canadian agricultural exports. Chinese tariffs on some Canadian farm products and seafood were subsequently suspended. Canadian canola producers welcomed the movement while noting that substantial work remained, and reporting since has flagged continuing uncertainty over the durability of the suspensions, with Chinese buyers having shifted toward Australian canola during the dispute.
The lesson for Canadian exporters is that market share lost during a trade action does not return automatically when the action ends. Buyers build new supplier relationships, qualify new sources and sign new contracts. The same dynamic now applies to the American market, where buyers displaced from Canadian plywood, paper, machinery and refrigeration equipment during the Section 338 period may not return simply because those lines leave the annex on October 30.
Diversification also runs into the logistics of geography. Canadian export infrastructure was built to move goods south. Redirecting volume to Asia or Europe requires port capacity, rail capacity and inland connections that do not appear on a policy timetable.
What Wednesday means for importers and exporters
The rate decision transmits to trading firms through four channels, and each warrants a specific response.
Financing cost is the most direct. A quarter point increase raises the carrying cost of inventory at a moment when many firms are holding larger than normal stock as a tariff hedge. Firms that accelerated entries ahead of tariff effective dates are financing goods they would not otherwise be holding, and the cost of that position just rose. Inventory positions built as hedges should be reviewed against the possibility that a trade agreement, or an adverse court ruling on Section 338, removes the duty that justified them.
The exchange rate is the second channel. A stronger Canadian dollar following a hawkish decision reduces the Canadian dollar value of American sales for exporters, partially offsetting the tariff relief that some firms will receive on October 30. Exporters invoicing in United States dollars should review hedge ratios ahead of Wednesday rather than after it. Importers of American goods face the mirror position and benefit from Canadian dollar strength.
Credit conditions are the third. Lenders to tariff exposed sectors have been tightening terms through the year, and a rising policy rate compounds that. Firms in steel, lumber, autos and now carpets and valves should expect more intensive scrutiny at renewal, and should be prepared to document their tariff exposure and mitigation plans rather than being asked for them.
Demand is the fourth and slowest. Higher rates work on domestic activity with a lag, which matters for firms that have substituted Canadian sales for lost American volume. Canadian steelmakers offsetting tariff pain with domestic demand are relying on a channel that monetary tightening will eventually narrow.
Three dated events this week
Canadian trade and finance teams face three fixed points over the next five days.
Wednesday brings the Bank of Canada decision at 9:45 a.m. Eastern time, followed by the Monetary Policy Report and the Governor’s press conference, where the forward guidance will matter more than the rate itself. The same morning brings American goods trade balance data, forecast at negative 128.7 against a prior reading of negative 132.1, a measure of flows before the Canadian tariff changes take effect.
Friday brings the Section 338 scope change. Plywood sheets, certain paper products, some machinery, refrigeration equipment and certain packing crates and boxes come off the 50 percent list. Carpets, certain valves, cocoa powder, air conditioning machines and waste products go on. Liability is determined by entry date, so goods entered for consumption or withdrawn from bonded warehouse on or after October 30 are judged against the new annexes.
The following Tuesday, November 3, brings American midterm elections, after which Canadian officials expect the negotiating posture in Washington to clarify. Trump told a rally in Port Huron, Michigan on Sunday that a deal would come soon and that Canada was willing to give the United States anything. White House economic adviser Kevin Hassett has said the sides are very close. Trade Minister Dominic LeBlanc has said Canada will not rush into terms that conflict with its interests, and Canadian officials do not expect an agreement before the vote.
The planning assumption
The practical question for a Canadian exporter is which of these signals to build a budget around, and the honest answer is that only one of them is reliable.
The tariff annexes change on Friday. That is certain and dated. The rate decision is near certain and dated. A trade agreement is neither, and the history of this dispute argues for discounting optimistic signals heavily. Negotiations were near completion in August and failed over late changes to American terms on autos. Bloomberg reported that a halving of Section 232 steel and aluminum tariffs had been within reach and it was not concluded. A near final deal that does not close is indistinguishable, for planning purposes, from no deal.
Against that record, Macklem’s judgement is the sounder planning assumption, and it has the advantage of being the one Canada’s central bank is itself using. Firms should assume elevated and variable border costs on United States bound trade as a standing condition, should treat each scope modification as an operational event requiring reclassification rather than as a signal about the direction of policy, and should price diversification investments against a multi year horizon rather than against the next round of talks.
Carney put the same point in different language on October 21. “Their approach has changed,” he said. “So must ours.” Ontario Premier Doug Ford was blunter: “No matter what happens in the midterms, no matter who sits in the White House, we’re not going back to the way things were.”
Wednesday’s decision will be read in the markets as a judgement on inflation. For Canadian exporters, the more useful information will be in what the Governor says afterward about how long he expects the border to stay expensive.
The small business transmission channel
Large exporters have treasury departments, customs counsel and the balance sheet to carry a duty for a quarter. The firms most exposed to this week have none of those things.
Small and medium sized Canadian enterprises account for a substantial share of cross border trade and are the least equipped to absorb either a classification change or a financing cost increase. A firm with one customs broker relationship and a revolving line of credit faces the October 30 annex change and the Wednesday rate decision as two simultaneous shocks to the same cash position.
The remission framework is the designed relief channel on the Canadian side, allowing relief from Canadian counter tariffs where no domestic or non American source exists or where a firm can show severe adverse effect. Its performance has drawn criticism. A small business group told a parliamentary committee on October 22 that remission files have sat in Ottawa for as long as a year. A relief mechanism operating on that timeline functions as an eventual reimbursement rather than as working capital support, which is what a small importer actually needs.
The practical guidance follows directly. Smaller firms should file remission applications on the assumption that approval will not arrive within the current fiscal year, should arrange financing for the duty in the interim, and should raise the delay with their member of Parliament rather than treating it as a fixed constraint. They should also review the provincial liquidity programmes, including Ontario’s cash flow support and Alberta’s increased contingency provision, which are faster to access than federal remission though smaller in individual value.
The trade remedy docket keeps moving
While the bilateral dispute dominates attention, Canada’s own trade remedy system has continued to generate decisions that change landed costs for Canadian importers, and these have nothing to do with Washington.
The Canadian International Trade Tribunal found on October 16 a reasonable indication that dumping of paperboard cups and containers from China is causing injury, following preliminary injury inquiry PI-2026-004. On October 7 the Tribunal partly continued its December 2020 order on oil country tubular goods from Chinese Taipei, India, Indonesia, South Korea, Thailand, Turkiye, Ukraine and Vietnam, following expiry review RR-2025-006. On October 1 it initiated expiry review RR-2026-007 of its December 2021 finding on certain small power transformers from Chinese Taipei and Korea. A final injury inquiry on wheat gluten from Italy, Poland and the United Kingdom, NQ-2026-006, began on September 18, and a September 22 finding held that dumping and subsidising of forged grinding media from China have not caused injury but do threaten it.
A separate recommendation sits on the Finance Minister’s desk. The Tribunal recommended in September a three year tariff rate quota on imported canned vegetables, with surtaxes of 40 to 50 percent on volumes above the quota. Finance Minister Francois-Philippe Champagne has said the government is still reviewing the report. A decision to implement would raise costs for Canadian food processors and retailers at a moment when consumer price inflation is already above the Bank of Canada’s target range, which is an awkward intersection of trade remedy policy and monetary policy that neither institution controls jointly.
Canadian importers sourcing any of these goods should treat the trade remedy docket as a separate and active risk register. Duties arising from Tribunal findings are not negotiable through diplomacy and are not affected by whatever is agreed with Washington.