Bank of Canada Expected to Hold Rates Amid Escalating Trade War

Bank of Canada Rate Outlook and Trade Pressures

The central bank has kept its overnight rate steady since October, balancing domestic economic data against external trade friction. According to a Reuters poll of 35 economists, policymakers will leave the rate unchanged at 2.25 per cent during the upcoming policy announcement, holding that level for at least another year. While Mark Carney walked away from recent trade negotiations on August 22, triggering retaliatory tariffs and business support measures, economists surveyed noted that growth risks roughly offset near-term inflation concerns.

“In the near term, any concerns over inflation ahead are roughly offset by risks to economic growth from trade tensions, leaving the Bank in a watchful-waiting stance,” said Avery Shenfeld, managing director and chief economist at CIBC Capital Markets.

Inflation and Economic Growth Dynamics

Headline inflation sat at 3 per cent in July, reaching the top end of the central bank’s 1-3 per cent target range due to an oil price shock tied to the Middle East conflict. However, stable core inflation indicates that underlying consumer demand remains subdued. According to official data cited by Reuters, the Canadian economy likely expanded at an annualized rate of 3.4 per cent in the second quarter, recovering from a previous technical recession and outperforming earlier forecasts.

Despite this stronger economic performance, analysts suggest that the new U.S. tariffs—affecting roughly 5 per cent of Canadian exports—will act primarily as a drag on gross domestic product growth rather than an immediate catalyst for runaway price increases. CIBC estimates the hit to GDP at about 0.5 per cent, while Royal Bank of Canada pegs the fallout at 0.4 per cent.

Currency Weakness and Countertariff Impacts

The breakdown in trade negotiations has also placed downward pressure on the Canadian dollar, introducing secondary price pressures across imported goods. According to Jennifer Lee, senior economist and managing director at BMO Capital Markets, currency depreciation creates an added inflationary effect that the central bank must monitor closely. Meanwhile, Ottawa’s planned countertariffs, scheduled to take effect in early September, aim to match U.S. duties dollar-for-dollar on targeted products like electrical equipment, plastics, and appliances.

While monetary policy lacks the precision to target specific hard-hit sectors such as automotive, steel, and aluminum, Governor Tiff Macklem has noted that the central bank’s primary role is to mitigate broader spillovers and help the economy adapt to structural shifts. Financial markets currently price in a continuation of the 2.25 per cent rate through the remainder of the year, with expectations for modest rate increases beginning in late 2027.

Frequently Asked Questions

What is the current Bank of Canada benchmark interest rate?

The benchmark overnight rate sits at 2.25 per cent, where it has remained since October.

Why are economists predicting no rate change at the upcoming meeting?

According to surveyed economists, near-term inflation pressures are roughly balanced by economic growth risks stemming from U.S. trade tensions, prompting the central bank to maintain a watchful-waiting stance.

How do U.S. tariffs affect Canadian inflation and GDP?

Economists expect the tariffs to cause a modest drag on gross domestic product growth of roughly 0.4 to 0.5 per cent, while currency weakness and targeted countertariffs add minor, localized upward pressure to consumer prices.