Addressing the Halifax Partnership, Bank of Canada Governor Tiff Macklem said the Canadian economy went into the summer months on an optimistic footing.
He cited non-energy exports that rose 14.5% on an annualized basis in the second quarter of 2026, their highest level since early 2025 and business investment that increased 8.8% over the same period.
Additionally, companies adjusted supply chains and diversified export relationships, reducing dependence on the US market.
"Taken together, these developments suggest the economy entered the summer in a stronger position," said Macklem. "Growth had resumed, investment was picking up and companies were beginning to look beyond the headwinds to opportunity."
But, as Fall arrives, Macklem says the optimistic view has fallen, and economic growth could be cut in half as US tariffs take a bigger bite and increasing tensions, adding rising oil prices are casting a pall over the Canadian economy, signalling a potential slowdown in business investment and hiring.
Macklem said if tariffs remain where they are, he estimates gross fourth-quarter gross domestic product (GDP) growth could be cut in half to below 1%. The affected goods represent approximately 5% of Canada's exports to the US.
On top of tariffs, Macklem said the war in the Middle East is damaging the capacity of global refining, reducing supply and increasing gasoline and diesel prices higher, holding consumer price index inflation near 3% for several months.
"The developments are pulling the economy in different directions," he said. "One creates downside risks to growth, while the other creates upside risks to inflation."
If global oil prices stay near US$100 per barrel, his expectation is, inflation could move higher than the target rate.
Which brings the Bank of Canada’s scheduled rate announcement on Oct. 28 into view and whether it will be the eighth hold in a row, an increase or a decrease.
Economists gave their opinions to Canada Mortgage Professional (CMP) on Tuesday.
Royce Mendes, head of macro strategy at Desjardins Group in Toronto, said the bank appears to be laying groundwork for a rate increase should energy prices hold, "but that's far from a foregone conclusion."
Douglas Porter, chief economist at BMO Capital Markets in Toronto, said the inflation threat had "rekindled chatter of a potential rate hike in 2026,"while maintaining that a weak economy and unresolved CUSMA uncertainty made an increase "a very long shot indeed."
Philip Petursson, chief investment strategist at IG Wealth Management in Canada, placed the next rate hike no earlier than 2027.
Stephen Brown, chief North America economist at Capital Economics, suggested "an interest rate hike at the final meeting of the year, in December, is arguably now looking more likely" if energy prices persist.
Macklem said monetary policy has limits, and the bank cannot offset tariff effects or control global energy prices.
"As these risks evolve, we are prepared to adjust monetary policy as needed," he said. "We remain focused on keeping inflation low, stable and predictable. In an uncertain world, that's one of the most important contributions we can make to the economic well-being of all Canadians."
He added there are risks associated with delaying a hike.
"Two things probably have to happen if you're too slow: One is, you're going to have to raise rates very quickly," he said. "And secondly, you're probably going to end up having to raise them more than if you moved earlier because things will have gotten more out of hand."
"We are going to make our best judgment and decide what we think is the best thing to do to bring inflation back to target."