BoC Governor Macklem says there have been two important economic developments since our July Report; inflation outlook has deteriorated and growth outlook for Canada has improved modestly

TWO IMPORTANT RECENT DEVELOPMENTS: First, the outlook for inflation has deteriorated. With the war in the Middle East persisting, global oil prices have increased and are expected to remain higher for longer. This is hitting Canadians at the gas pump and increasing costs for many businesses. Second, the growth outlook for Canada has improved modestly, despite continued trade actions by the United States. Growth picked up through the middle of the year, and exports and business and government investment are expected to support a further recovery. ECONOMY: With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation. Mindful that uncertainty is still elevated. Developments in the Middle East and Canada-US trade relations both remain fluid. There is also uncertainty about the impact of new US tariffs and how much energy costs will seep into consumer prices more broadly. Looking ahead, growth will likely slow in Q4 as new US tariffs weigh on activity. But growth should pick up again in 2027 as consumer spending continues, exports pick up and business investment strengthens, supported by fiscal measures. HIKE/HOLD ARGUMENT: The main argument for holding was that the rise in inflation has so far been concentrated in energy prices and in services that rely heavily on energy inputs, such as airfares. In addition, while growth has been better than expected, economic slack remains, and new US tariffs will weigh on growth. The main argument for an increase was that energy prices are higher, they are expected to remain higher, and cost pressures are building.