CIBC Warns Weaker Canadian Dollar Poses Inflation Risk, Complicates BoC Outlook

A weakening Canadian dollar is threatening to complicate the Bank of Canada's monetary policy outlook by adding to inflationary pressures, even as the domestic economy faces headwinds from potential U.S. trade tariffs, according to an analysis by CIBC Capital Markets.

Currency-Driven Inflation Pressures

The Canadian dollar, often called the "loonie," has depreciated by about 5% against the Bank of Canada’s trade-weighted currency basket since early summer 2025, CIBC economist Avery Shenfeld noted. A weaker currency makes imported goods more expensive, which can feed into higher consumer prices.

CIBC's analysis suggests this depreciation could add approximately 0.3 percentage points to inflation at its peak impact. The bank forecasts Canada's annual inflation rate will rise to 3.2% in September from 3.0% in August, driven largely by gasoline prices. However, core inflation measures are expected to remain closer to the 2% target, which could support the case for the central bank to hold interest rates steady.

A Policy Dilemma for the Bank of Canada

The currency's slide presents a dilemma for the Bank of Canada (BoC). While the inflationary effects could argue for tighter monetary policy, the central bank must also consider mounting economic risks, including weakening domestic demand and escalating trade tensions with the United States.

Ad

A key risk highlighted by CIBC is a threatened 50% U.S. tariff on Canadian autos and parts, potentially starting January 1. This, combined with a potential decline in oil prices, could weaken growth enough to prompt the BoC to consider cutting rates next year, which would likely put further downward pressure on the loonie.

Limited Offset for Exporters

While a weaker currency typically boosts exports by making a country's goods more competitive, CIBC cautioned that this benefit may be limited for Canada. Many Canadian manufacturers depend on inputs priced in U.S. dollars, which blunts the competitive advantage of a lower loonie.

The report states that any improvement in competitiveness would likely be concentrated in industries not directly affected by tariffs. CIBC advises that the BoC is unlikely to raise rates solely due to a temporary, currency-driven rise in prices, and suggests investors monitor the broader U.S. dollar index to gauge how exchange-rate movements might influence future central bank decisions.