The Bank of Canada held its policy rate at 2.25% on September 2, the seventh consecutive decision at that level since cutting from 2.50% on October 29, 2025. Governor Tiff Macklem's statement flagged a specific risk: tariffs and oil prices tied to the widening Iran conflict could push inflation above 3% and force the Bank to consider a hike, not the cut that markets had been debating for much of the spring.
The Bank has been on the sidelines since late 2025, and Wednesday's hold was widely expected. What is less widely discussed is how much of the Bank's inflation cushion has already eroded since the cutting cycle ended.
The Rate Has Not Moved Since October. Inflation Has Moved Three Times.
Headline inflation and the overnight rate have followed very different paths since last August, with the policy rate cut twice into an inflation trough and then held flat through a subsequent climb back above target.
Headline CPI inflation has risen in three of the last four months while the Bank of Canada's overnight rate has held at 2.25% since October 29, 2025. The relationship between the two lines has flipped since February, when the policy rate sat roughly half a point above inflation; by July, inflation sat three quarters of a point above the policy rate.
Inflation bottomed at 1.8% in February, comfortably inside the Bank's 1% to 3% control range and close to the 2% midpoint the Bank targets. It has not stayed there. April brought 2.8%, May brought 3.2%, and July brought 3.0%, the second reading above the top of the range in three months. June's 2.8% reading was the only month in that stretch that offered any relief.
The Bank cut rates twice in the fall of 2025, from 2.75% to 2.50% in September and to 2.25% in October, at a moment when inflation was still inside the target range and the growth outlook looked weak enough to warrant easing. Ten months later, growth is showing rebound signs after a year of stagnation, and inflation has moved back toward the top of the range the Bank is mandated to defend. The rate has not moved at all.
What Happens if the Fed Moves First
The U.S. Federal Reserve meets September 15 and 16, and hawkish signals from Fed leadership have already widened the rate differential enough to weaken the Canadian dollar to 1.3882 per U.S. dollar, from a three month high of 1.376 reached August 21. A Fed that holds or signals fewer cuts than expected would widen that differential further and add currency driven imported inflation pressure to a Bank of Canada that is already describing inflation risk as rising.
The Bank's next scheduled decision is October 28, alongside a full Monetary Policy Report carrying updated growth and inflation forecasts. That report lands after Canada's new counter-tariffs have been in effect for three weeks, giving the Bank its first real read on how much of the tariff cost is passing through to consumer prices rather than being absorbed by exporters or offset by the federal support programs announced in August.