Newly released Bank of Canada deliberations show policymakers worried the reignited tariff fight will chill spending and hiring, even as markets move to price a rate hike. What the record says, and what it means for trade-exposed businesses.
OTTAWA, SEPTEMBER 18, 2026 | Peacock Tariff Consulting
The Bank of Canada’s governing council entered its September rate decision preoccupied by a single question: whether a re-escalating trade fight with the United States would break the momentum of an economy that had, until late August, been outperforming expectations. The answer, according to the summary of deliberations released Wednesday, was that nobody on the council was confident it would not.
The document, published on September 16, covers the discussions that produced the Bank’s September 2 decision to hold the policy interest rate at 2.25 per cent, the seventh consecutive hold. The decision itself had been widely anticipated by economists. The reasoning behind it is more revealing, and it lands at an awkward moment: financial markets have shifted toward pricing a rate increase, and the United States Federal Reserve raised its own policy rate by a quarter point on the same day the Canadian deliberations were published.
Meetings that began days after the tariffs landed
Timing shaped the discussion. The governing council’s meetings began on August 25, three days after the United States imposed 50 per cent tariffs on roughly 28 billion dollars of Canadian goods on August 22. Those duties, issued under Section 338 of the Tariff Act of 1930, followed the collapse of bilateral negotiations and the lapse of a brief three-day suspension.
The retaliatory sequence that followed had not yet occurred when the council met. Canada’s counter-tariffs on more than 700 American product lines took effect on September 8, the same day Washington issued proclamations converting some of its duties into outright import bans effective September 29. In other words, the council was assessing the opening move of an exchange that has since escalated twice.
At the time, monetary policymakers judged that the August 22 tariffs would hit targeted sectors hard but that the effect on the overall economy would probably be modest. That assessment rested on a genuinely solid starting position.
An economy that was, on paper, doing well
The macroeconomic backdrop going into the meeting was better than most forecasters had expected at the start of the year. Gross domestic product grew 3.3 per cent in the second quarter of 2026. The unemployment rate edged down to 6.4 per cent in July. The council observed that the housing market appeared to be recovering after an extended slowdown, that exports and business spending were picking up, that the private sector was adding jobs, and that household balance sheets looked solid.
That is not the profile of an economy that needs monetary stimulus. It is closer to the profile of one that could absorb a shock. The council’s concern was not the arithmetic of the tariffs themselves but the psychology around them.
“While the government’s fiscal response and businesses’ ongoing efforts to adapt to tariffs and trade uncertainty should help mitigate some of the impact, members agreed that the latest developments made the sustainability of that recovery more uncertain,” the deliberations read.
That sentence carries the weight of the document. The Bank’s worry is a confidence channel: households postponing purchases, firms deferring capital expenditure, employers delaying hiring decisions, all of it triggered less by measurable tariff costs than by the difficulty of planning when the rules change every fortnight.
Counter-tariffs judged not to be an inflation problem
One finding in the deliberations cuts against a widely held assumption. The central bank did not view Canada’s own counter-tariffs as a significant inflationary risk.
The reasoning is specific. Because the retaliatory duties were concentrated on intermediate inputs such as steel, and on finished goods for which Canadian substitutes exist, “the impact on inflation would likely be muted and spread out over time,” the deliberations said.
This is a meaningful signal for importers. Ottawa designed its countermeasures with substitution in mind, selecting product lines where Canadian or third-country supply can absorb displaced demand. The Bank’s assessment implicitly endorses that design. It also implies that firms hoping to pass counter-tariff costs straight through to Canadian customers may find less room than they expect, because the substitution the policy was built to encourage is the same mechanism that caps the price effect.
Independent estimates have put the consumer cost of the retaliation higher. An analysis published in early September by economist Trevor Tombe assessed the potential hit to Canadian consumers from the counter-tariff package at up to 4 billion dollars. The two views are not strictly contradictory: a measurable cost to households can still be modest relative to the size of the consumer price index, and spread thinly enough across categories and months to leave headline inflation largely unmoved.
The energy shock the Bank is actually watching
The more acute inflation concern in the deliberations is not trade policy at all. It is fuel.
The council devoted substantial discussion to elevated energy prices linked to the war in Iran, and to the possibility that those prices could force a policy adjustment at future meetings if cost pressures begin to spread.
“While there was little evidence thus far that high gasoline prices were passing through to other goods and services, members agreed that the longer they were high, the more likely they would be passed through. This increased the upside risks to inflation,” the deliberations read.
For trade-exposed businesses, that passage sets up an uncomfortable interaction. Sustained high fuel prices raise freight and logistics costs at exactly the moment when tariff barriers are forcing firms to reroute supply chains, lengthen shipping distances, and hold larger buffer inventories. The cost of adapting to the trade war rises with the price of diesel and bunker fuel.
The council did note one offsetting mechanism. If the tariff dispute does hamper growth, that weakness could partly neutralise the inflationary pressure from the energy shock. That is not a comforting form of relief, but it is an accurate description of how a supply shock and a demand shock can partially cancel in a central bank’s models.
Tighter global financial conditions
The deliberations also recorded a tightening in global financial conditions since the Bank’s July decision.
“Long-term bond yields have moved up amid concerns about sovereign debt levels and expectations that central bank policy rates would need to increase to restrain inflation,” the council noted. “Canadian bond yields also rose, albeit by less than yields in several other advanced major economies.”
That relative outperformance matters. Canadian yields are the benchmark for domestic lending rates and mortgage pricing. A smaller increase in Canadian yields than in peer economies suggests that markets, at least as of early September, were pricing Canada as less likely than others to require aggressive tightening. That gap has narrowed since.
Markets now lean toward a hike
For most of 2026, financial market pricing has been weighted toward continued holds from the Bank of Canada. That has changed.
As of Wednesday afternoon, the implied probability of a rate increase at the Bank’s next decision stood at 60 per cent, according to LSEG Data and Analytics. Markets are, in other words, now more likely than not to expect tightening from a central bank that has been on hold for seven consecutive meetings and whose last move, in October 2025, was a cut.
The Federal Reserve’s decision on Wednesday reinforced the shift. The United States central bank raised its policy rate by a quarter point in a unanimous vote, its first increase in three years, in response to inflation pressures building south of the border. Divergence between the two central banks has consequences for the exchange rate, and a weaker Canadian dollar is itself mildly inflationary for a country that imports a large share of its consumer goods.
The governing council closed its September meeting by agreeing to emphasise that future decisions would be guided by the inflation outlook and by its commitment to price stability. That is deliberately non-committal language, and it preserves optionality in both directions.
October 28 is the date that matters
The Bank will publish updated forecasts for growth and inflation alongside its next rate decision on October 28. That will be the first complete official quantification of the tariff war’s economic effect, incorporating the August 22 American duties, the September 8 Canadian counter-tariffs, the September 15 duty-stacking change that pushed combined additional rates on certain steel and aluminum lines to 75 per cent, and the September 29 import bans.
October will also mark one full year since the Bank last moved its policy rate.
The starting point: an economy already reshaped by tariffs
The council’s relative calm about the August duties reflects more than a strong quarter. Canada has now spent well over a year adjusting to American trade measures, and the adjustment has been visible in the trade data.
Through 2025, Canada’s combined goods and services trade deficit widened to 29.0 billion dollars, the highest level of the post-pandemic period. Stripping out price effects, export volumes for goods and services declined 1.4 per cent over the year, the first annual decrease since 2009. Within that aggregate, the composition shifted sharply: products facing high tariff rates, notably steel and aluminum, recorded strong declines, while exports of unwrought gold rose sharply, flattering the headline figures in a way that told observers little about the health of manufactured exports.
That pattern is worth holding in mind when reading the Bank’s assessment that sectoral damage would not translate into an economy-wide shock. The statement can be true at the level of national accounts while concealing severe distress in specific industries and regions. A national GDP growth rate of 3.3 per cent is consistent with a steel town in a recession.
Why the confidence channel is the one that worries policymakers
Central banks are comfortable modelling price shocks. They are less comfortable modelling the decision by a business owner to postpone a purchase order because the rules might change again.
The direct arithmetic of a tariff is tractable. A 50 per cent duty on a defined set of goods worth 28 billion dollars has a calculable first-order effect on a roughly 3 trillion dollar economy, and that effect is meaningful but bounded. What the council flagged instead was the second-order behaviour: firms holding back capital expenditure, deferring hiring, and shortening planning horizons, not because their own costs have risen but because they cannot forecast the environment.
This is the mechanism by which a bounded shock becomes an unbounded one. If enough firms defer simultaneously, aggregate demand falls by far more than the tariffs themselves would justify, and the slowdown validates the caution that caused it. The council’s language, noting that recent developments made the sustainability of the recovery “more uncertain,” is central bank phrasing for exactly that concern.
It is also a mechanism monetary policy is poorly equipped to counter. A rate cut does not restore predictability to trade policy. Fiscal support can cushion income losses but does not tell an exporter what tariff schedule will apply in the spring. The Bank’s most useful contribution in this environment may be clear communication rather than rate action, which is consistent with the council’s decision to close its meeting by emphasising its commitment to price stability.
The policy dilemma in plain terms
Strip away the technical language and the Bank faces a straightforward bind.
Energy prices, driven by the war in Iran, are pushing inflation up and threatening to broaden beyond fuel. That argues for higher rates. Trade disruption is threatening growth, investment and employment. That argues for lower rates, or at minimum for patience. The policy rate is a single instrument and cannot address both.
Complicating the choice, the two shocks operate on different timelines. Energy pass-through, if it occurs, builds over months as contracts reprice and transport costs feed into goods prices. Confidence effects on investment can appear within a quarter and are difficult to reverse once capital plans are shelved. A central bank that tightens against an energy shock and then discovers the trade shock was larger than expected will have compounded the damage.
The reverse error is equally available. Holding through a genuine inflation acceleration, at a time when the Federal Reserve has begun tightening and the currency is under pressure, risks having to move faster and further later.
The council’s chosen path, waiting for the October forecasts, is the option that preserves the most information. It is also the option that carries the risk of acting late in whichever direction turns out to be correct.
What this means for Canadian businesses
The deliberations carry several practical implications for firms managing trade exposure.
On financing, the era of assuming the next move is down has ended. Businesses with floating-rate debt, revolving facilities tied to prime, or refinancing scheduled for the coming twelve months should stress-test against a rate increase rather than a cut. A 60 per cent market-implied probability of a hike is not a forecast, but it is a materially different planning assumption than the one that prevailed for most of this year.
On pricing, the Bank’s view that counter-tariff costs will be muted and spread over time should temper expectations of rapid cost recovery. Importers absorbing 15, 25 or 50 per cent duties on American inputs will find that competitive pressure from substitutable Canadian and third-country supply limits how much can be passed through, particularly in categories Ottawa specifically selected because alternatives exist.
On capital planning, the confidence channel the council identified is self-fulfilling in aggregate but manageable at the firm level. Companies that defer investment because peers are deferring investment contribute to precisely the slowdown the Bank is worried about. Firms with the balance sheet capacity to proceed may find reduced competition for contractors, equipment and skilled labour in the interim.
On input costs, the fuel channel deserves explicit modelling. Freight surcharges, fuel-adjustment clauses in carrier contracts, and the cost of holding larger inventories to buffer against border disruption all scale with energy prices. Supply chain reconfigurations that look economic at one diesel price may not be at another.
On government support, the federal package of roughly 7.5 billion dollars in new and enhanced measures announced alongside the counter-tariffs remains available, including easier access to Employment Insurance for affected workers and a range of business loan programmes. Ottawa has also confirmed it will continue accepting remission requests, which can provide an exemption from counter-tariffs or a refund of duties paid, for businesses facing significant harm. Firms with exposure to the counter-tariff list and no viable substitute supply should be preparing remission applications now rather than after margins have already compressed.
The exchange rate channel nobody is talking about
One consequence of the divergence between Ottawa and Washington deserves more attention than it has received. The Federal Reserve has begun tightening. The Bank of Canada has not. If that gap persists, the interest rate differential works against the Canadian dollar.
For exporters, a weaker currency is a partial offset to tariff costs, improving competitiveness in markets not covered by American measures and cushioning revenue translated back into Canadian dollars. For importers, it compounds the problem: goods that already carry a 15, 25 or 50 per cent counter-tariff become more expensive again in Canadian dollar terms.
The inflation consequence runs through the same channel. Canada imports a substantial share of its consumer goods, and currency depreciation raises the price of all of them, not only those on a tariff list. That is a broad-based price effect of exactly the kind the Bank judged the counter-tariffs themselves would not produce. If the currency moves far enough, it could deliver through the exchange rate the inflation the council concluded the retaliation would not generate directly.
Firms with unhedged United States dollar payables should be reviewing their positions. So should those whose supply contracts are denominated in dollars but whose revenues are not.
What the October forecast needs to answer
When the Bank publishes its updated projections on October 28, three questions will determine how the document is read.
The first is how much of the tariff effect the Bank assumes is permanent. A forecast built on the assumption that the dispute resolves within two quarters produces a very different growth path than one that treats the current tariff structure as the new baseline. Given that negotiations collapsed in August and that Washington has since escalated twice, the case for treating the disruption as durable has strengthened.
The second is whether business investment has already turned. Investment intentions surveys and the Bank’s own Business Outlook Survey will carry more information than the headline GDP print, because they capture the confidence channel before it appears in the national accounts.
The third is how the Bank characterises the energy shock. If the October documents describe fuel price pressure as having broadened into core goods and services, the case for a hike becomes difficult to resist regardless of what the trade file is doing.
The wider reading
What the September deliberations describe is a central bank caught between two shocks pointing in opposite directions and unable to lean decisively against either. The energy shock pushes inflation up. The trade shock pushes growth down. Conventional monetary policy has one instrument and two problems.
The Bank’s resolution, for now, is to wait. That is defensible while the incoming data still show a resilient economy, and it preserves capacity to respond once the direction becomes clearer. It is less defensible if the confidence effects the council identified begin showing up in the hard data before October 28, which would leave the Bank having held through the start of a slowdown.
For Canadian exporters and importers, the more useful conclusion from the document is not about the policy rate at all. It is that the country’s central bank, with the best available information, cannot currently forecast the economic path of the trade dispute with confidence. Firms should not expect to do better. The planning response to that is not more precise forecasting but more flexibility: shorter commitment horizons, diversified supplier bases, contractual terms that allocate tariff risk explicitly, and liquidity buffers sized for a longer disruption than the current headlines suggest.