Bank of Canada Shifts Inflation and Rate Strategy

Bank of Canada Governor Signals Shift in Inflation Measures and Interest Rate Strategy

By Editorial Analysis | November 2025

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In recent remarks, Bank of Canada Governor Tiff Macklem provided important insight into the central bank’s evolving stance on inflation measurement and its interest-rate strategy. His comments come amid an uptick in inflation data and growing global economic uncertainty. Understanding this turn in policy tone offers key implications not only for Canada’s financial markets and households but also for macroeconomic stability and the credibility of monetary policy.

The backdrop: Inflation and economy in Canada

Canada has experienced a remarkable inflation journey over the past few years. After peaking above 8 percent in 2022, inflation has come down but remains elevated relative to the 2 percent target midpoint. Bank of Canada.

Most recently, Canada’s headline inflation rate rose to 2.6 percent in February 2025 — the highest in eight months. Reuters. Although within the Bank’s 1–3 percent control range, this rate remains above the midpoint, suggesting persistent price pressures.

The Canadian economy achieved what Macklem described as a “soft landing,” meaning inflation eased without deep recession. Yet uncertainties persist—trade tensions, tariffs, supply-chain stress, and structural productivity issues continue to weigh. BNN Bloomberg.

A shift in inflation measurement and policy framing

1. Inflation measurement and structural risk

The Bank of Canada has traditionally emphasized headline CPI and core inflation measures that exclude volatile items like food and energy. However, Macklem now stresses that the Bank will pay closer attention to supply-side pressures, trade shocks, wage growth, and evolving inflation expectations.

“Headwinds that limit supply could mean more upward pressure on inflation going forward. And more frequent supply shocks could mean more variability in inflation.” CP24

This signals that inflation may not simply revert to target via demand cooling alone. Structural shocks, such as tariffs and supply disruptions, complicate both measurement and policy response. The 2026 policy-framework review will explore how to measure core inflation better, respond to supply shocks, and assess how housing affordability interacts with monetary policy.

2. Interest-rate strategy: from forecasting to risk management

The Governor signaled a move from forecast-based policy toward scenario-based risk management. Instead of relying on a single “central projection,” the Bank will prepare for multiple possible outcomes under uncertainty.

“We need to set policy that minimises risk… That means being less forward-looking than normal until the situation is clearer. And it may mean acting quickly when things crystallize.” BNN Bloomberg

• The Bank may act quickly if risks crystallize.
• Forward guidance will be modest, focusing on “one meeting at a time.”
• Policy will prioritize robustness across various scenarios.

Current stance and near-term outlook

The Bank’s benchmark rate stands at 2.75 percent after seven consecutive cuts. BNN Bloomberg.

Macklem reiterated that inflation must return sustainably to 2 percent before further cuts are justified. He described the current rate as the “low end of the ideal balance” between growth and inflation. Yahoo Finance.

• No aggressive rate cuts are expected soon.
• The bias leans toward holding or possibly raising rates.
• Policy remains flexible and data-dependent.

Implications for households, businesses, and markets

For households

Higher rates raise borrowing costs for mortgages, credit cards, and auto loans. Given Canada’s high household debt, this is significant. Macklem acknowledged the pain but framed it as necessary for achieving price stability. Global News.

For businesses

Firms now face more uncertainty regarding borrowing and investment planning. Supply-side risks like tariffs or productivity issues mean cost volatility will likely persist, requiring adaptable strategies.

For financial markets

Markets interpret the Bank’s new approach as maintaining optionality—not rushing to cuts but ready to tighten if needed. This could delay rate-cut expectations and sustain steeper yield curves for longer periods.

Key risks and uncertainties

• Supply shocks such as tariffs or energy disruptions could reignite inflation.
• Strong wage growth relative to productivity risks entrenching inflation.
• Sticky shelter costs could delay the return to target.
• Weaker growth could push the Bank to ease prematurely.
• Global policy divergence may affect Canada’s exchange rate and capital flows.

Why this shift matters

The shift underscores two main goals:

• Credibility and expectations management: The 2 percent inflation target remains firm, signalling stability amid evolving complexity.
• Policy effectiveness: The Bank acknowledges a more volatile world and adapts policy tools accordingly.

What to watch next

1. Core inflation metrics (median, trimmed mean, CPI excluding shelter).
2. Wage growth and productivity trends.
3. Housing and rent inflation developments.
4. Global tariff and trade movements.
5. Rate path communications and market reactions.
6. Upcoming policy meetings and statements.

Conclusion

Governor Macklem’s remarks reflect a significant evolution in the Bank of Canada’s policy mindset. The 2 percent target stands, but the path forward is seen as more dynamic and risk-oriented. Canadians can expect rates to stay elevated a bit longer, while markets and businesses must adapt to a more flexible, scenario-driven central bank approach.

As the Bank monitors incoming data, the next few quarters will be crucial in determining whether inflation can sustain its downward path and how effectively policy can respond to the unpredictable global environment.