The Bank of Canada is expected to keep its benchmark rate at 2.25 per cent . Market participants are now analyzing Governor Tiff Macklem's rhetoric for clues on future hikes amid escalating trade friction with the United States.
The 3 per cent trajectory in swaps markets
While the immediate decision by the Bank of Canada is likely to be a hold, the financial markets are signaling a shift toward tightening. According to Bloomberg data, swaps markets as of Tuesday have priced in a quarter-point increase by January , with potentially three more hikes arriving by July of next year.. This trajectory suggests that the benchmark rate could climb to approximately 3 per cent.
This market sentiment represents a pivot from earlier in the year. In the spring, investors anticipated hikes based on Middle East tensions, which did not materialize as expected. However, the current pricing reflects a growing belief that the Bank of Canada will be froced to raise rates to combat the specific inflationary pressures emerging from North American protectionism.
The September 8 countertariff deadline
A critical date for the Canadian economy is September 8, when Canada is planned to implement countertariffs on various American goods. As the report indicates, this move creates a policy paradox for Governor Tiff Macklem: tariffs typically stifle economic growth, which would normally trigger rate cuts, but they simultaneously drive up consumer prices, which necessitates rate hikes.
The risk of a "stagflationary" environment is high, as the United States has already threatened to retaliate against these Canadian countermeasures. This cycle of retaliation creates an unstable foundation for the Bank of Canada, as the central bank must decide whether to prioritize the prevention of a recession or the containment of price spikes caused by trade barriers.
Strait of Hormuz volatility and the 3 per cent July inflation peak
Inflationary pressures are not limited to trade wars; energy markets are adding significant volatility. Constraints on oil shipments flowing through the Strait of Hormuz have impacted West Texas Intermediate benchmark pricing , directly increasing costs for Canadian consumers at the pump. This energy shock contributed to Canada's headline inflation rate hitting 3 per cent in July, which is the absolute ceiling of the Bank of Canada's target range.
Although the Bank of Canada maintains a formal inflation target of 2 per cent, it allows for some flexibility to avoid overreacting to temporary spikes. Currently, core inflation measures—which remove volatile items like energy—remain closer to the 2 per cent target. This discrepancy suggests that while the underlying economy is stable, external geopolitical shocks are pushing the headline numbers dangerously high.
Royce Mendes and the missing stagflation playbook
The current crisis has exposed a gap in the central bank's strategic planning. royce Mendes, head of macro strategy at Desjardins Securities, has noted that the Bank of Canada has not recently provided a comprehensive playbook for managing simultaneous upside inflation risks and downside growth risks. Mendes suggests that in a period where the economy is "under assault," the Bank of Canada should ideally align with fiscal policy by lowering rates to stimulate activity.
However, the Bank of Canada's strict inflation mandate often overrides growth concerns. This leaves several critical questions unanswered: how will Governor Tiff Macklem signal a shift in strategy if growth collapses faster than inflation falls, and will the central bank acknowledge the limitations of monetary policy in the face of geopolitical trade wars? The source reports only the bank's current stance and market expectations, leaving the specific internal debate at the Bank of Canada regarding these conflicting mandates largely opaque.
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