Decoded No. 8: The Bank of Canada’s Silent Trap (full note, PDF)

Decoded, analysis note No. 8. Driss EFFINA, PhD. October 2026. PDF, 26 pages, 15 charts and diagrams, 9 tables.

The Bank of Canada has held its policy rate at 2.25 percent at every decision since October 2025, and on 28 October 2026 it must decide again, with a new Monetary Policy Report. Headline inflation is 3.1 percent, core inflation 1.8 to 1.9 percent and unemployment 6.5 percent, and the Bank is caught between forces it does not control: oil up 79 percent since February, a Fed hike on 16 September, US tariffs of 50 percent on about 20 billion US dollars of Canadian goods from 22 August, the non-renewal of CUSMA on 1 July, and a Canadian dollar down to 70.5 US cents in October even though oil, which used to lift it, has soared. This note measures the trap with five original tools built on official data: a trade-off map of unemployment and inflation gaps across five economies; a decomposition of Canadian inflation into energy, food, shelter, other goods and services and exchange-rate pass-through; new estimates of pass-through and of the loonie’s fundamentals; a loss function whose weights are revealed by the Bank’s own reaction function since 2015; and a monthly trap index that is high only when the pressures to hike and to ease are high at the same time.

Inside the full note:

• The setting in numbers
• The trade-off map
• Decomposing the 3 percent
• Exchange-rate pass-through: real, but small
• The loonie and the Fed: a petro-currency that did not rise
• The debt constraint: why a hike is expensive
• The loss function: why the Bank is trapped
• The trap index
• Scenarios for the next four decisions
• Leading-indicators dashboard
• Implications for policy, investors and households
• What to watch

Read the free preview: The Bank of Canada's Silent Trap.