What Could Change This Forecast? The Bank of Canada's Own Risk List, Explained

Every economic forecast comes with an implicit asterisk. The Bank of Canada is unusually direct about naming theirs. In the July Monetary Policy Report, they laid out specific risks that could push inflation, and by extension interest rates, in either direction. Worth knowing what they are so you're not caught off guard.

The two risks that matter most

The Bank named these two explicitly as the most important risks to the entire inflation outlook: how Canada's trade relationship with the United States evolves, and how the war in the Middle East unfolds. Everything else in the forecast sits downstream of those two.

On trade, the current projection assumes the Canada United States Mexico Agreement stays in place with annual reviews and that trade related uncertainty gradually fades. If the US announces further trade measures, or if uncertainty persists longer than assumed, that could weaken business investment and household spending beyond what's currently priced into the forecast.

On the Middle East, the projection assumes shipping through the Strait of Hormuz gradually normalizes. As of the report's writing, the strait had closed again amid escalating hostilities. A sustained closure would push energy prices back up and disrupt other commodities, pushing inflation higher globally, not just in Canada.

What could push inflation higher

Beyond the two named risks, the Bank flagged two more specific possibilities. Cost pressures from the war could turn out stronger than expected if businesses pass more of their rising input costs onto consumers than currently assumed. And trend productivity growth could come in weaker than the Bank's base case assumes, which would mean less economic slack than currently estimated and more upward pressure on prices.

What could push inflation lower

On the other side, a sharp correction in AI driven equity markets in the US could tighten global financial conditions and dampen demand for Canadian goods and services. Separately, the current pickup in GDP growth might not hold if export competitiveness issues persist, if trade uncertainty triggers further sector specific layoffs, or if the unsold condo overhang in Vancouver and Toronto keeps housing investment weaker than projected for longer.

Why this list is actually useful to you

This isn't a reason to freeze up. It's a reason to know what to watch instead of reacting to every headline. If you see news about US trade measures or escalation in the Middle East, that's genuinely relevant to where rates go next. Most other headlines are noise against this base case.

I keep an eye on this so you don't have to parse forty six pages of a central bank report yourself. If you want to talk through how any of this affects your specific timeline, reach out any time.