The Bank of Canada is widely expected to keep its benchmark interest rate at 2.25% this Wednesday. This move comes as new U.S. tariffs and retaliatory measures from Ottawa cloud the national growth outlook.
The 99% Probability of a Seventh Consecutive Hold
Financial markets are almost certain that the Bank of Canada will maintain its current policy rate, with LSEG Data and Analytics reporting a 99% probability for a seventh straight hold. the benchmark rate has remained at 2.25% for nearly a year, reflecting a cautious approach by policymakers who are hesitant to make moves they might later have to reverse .
According to the report by The Canadian Press, economists expect the central bank to signal an "easing bias" during Wednesday's announcement. Tony Stillo, director of Canada economics at Oxford Economics, suggests that while a rate cut is unlikely this week, the Bank of Canada will likely signal a willingness to lower rates if the economy performs more weakly than anticipated .
How 50% U.S. Tariffs on Canadian Exports Shift the Calculus
The economic landscape shifted significantly on August 22, when the United States imposed 50% tariffs on approximately 5% of Canadian exports. This escalation has forced Canada to announce its own retaliatory counter-tariffs, which are scheduled to take effect on September 8. These trade frictions have disrupted previous market expectations that the Bank of Canada would remain on the sidelines through 2027 .
Further instability looms on the horizon as U.S. president Donald Trump has threatened to implement even steeper levies on automobiles and auto parts starting January 1, 2027. As reported by The Canadian Press, these threats create a climate of uncertainty that may chill long-term business investment and growth, potentially pushing Governor Tiff Macklem toward easing the policy rate to offset the trade headwinds.
The Tension Between Q2 GDP Growth and a Darkening Outlook
Recent data from Statistics Canada shows that the Canadian economy grew at its fastest pace in more than three years during the second quarter. This surge followed a period of nearly stagnant growth, which under normal circumstances might have provided a compelling argument for the Bank of Canada to consider rate hikes.
However, BMO chief economist Doug Porter warns that the trade battle "darkens the growth outlook," likely neutralizing the positive GDP data.. Porter suggests that the third quarter of this year could mirror the early days of the 2025 trade war, where a lack of clarity regarding tariffs weighed heavily on overall business activity and dampened economic momentum.
Will Businesses Pass Retaliatory Tariff Costs to Consumers?
A significant unanswered question is whether the retaliatory tariffs effective September 8 will lead to higher prices for Canadian consumers. while annual inflation stood at 3% in July, Tony Stillo of Oxford Economics notes it is unclear if businesses will pass these new costs onto customers or absorb them due to weak demand.
Additionally, the Bank of Canada must monitor the Middle East conflict , which Governor Tiff Macklem has previously warned could trigger energy price shocks. If these shocks spread beyond gas pumps, the central bank could find itself in a contradictory position, forced to consider rate hikes to fight inflation even as trade wars pull the economy toward a slowdown.
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