Key Takeaways
- Economists widely expect the Bank of Canada to hold rates steady on Sept. 2, even as they may signal caution over worsening trade conflict.
- Policymakers will continue to weigh Iran-war-driven inflation against the pace of economic recovery, analysts say.
- Some expect more easing bias as trade uncertainty weighs on growth.
The Bank of Canada is widely expected to leave rates unchanged at its Wednesday policy meeting. The key question is: How long can it keep holding amid the escalating trade war?
Dramatic conflict in US-Canada trade negotiations last week led to swift announcements of tit-for-tat tariffs, which cast a shadow over Canada’s economic outlook. Economists say that, while the tariffs could dent the economic recovery, the Bank of Canada will likely stay on the sidelines at its meeting on Sept. 2.
“These developments reinforce our view that the policy rate is likely to remain lower than financial markets are pricing in,” says Tony Stillo, head of Canada economics at Oxford Economics. “We expect this mix of weaker growth, higher prices, and greater trade policy uncertainty to keep the Bank of Canada’s policy rate at 2.25% well into late 2027 or early 2028.”
Following a strong second-quarter GDP report last week, the market sees an 11% chance that the central bank hikes rates. Most analysts don’t believe a raise is coming later this year. The Bank has held its policy rate at 2.25% since December.
Trade War Stands to Weaken the Canadian Economy
US President Donald Trump’s C$28 billion worth of Section 338 tariffs on select Canadian products came into effect on Aug. 22. On Aug. 25, Prime Minister Mark Carney announced retaliatory tariffs on American imports equivalent to the new US tariffs, dollar for dollar. Meanwhile, Washington ramped up its threat by doubling tariffs on Canadian cars, trucks, and auto parts to 50% starting Jan. 1, 2027.
“The tariffs and counter-tariffs will have growth-dampening and inflationary impacts,” says Shelly Kaushik, senior economist at BMO Economics. “On net, we judge the hit to growth will likely be larger.” She expects the Bank of Canada to have a dovish bias at Wednesday’s meeting, and for interest rates to stay where they are through year-end.
Citi economist Veronica Clark says that even before the latest tariff announcements, overall growth was running below potential. “It would likely still take some time to close the output gap,” she says. “But new tariffs and trade disputes will be a new headwind to a sustained recovery.” Clark is an outlier in her base case that “the Bank will still be lowering rates by another 50 basis points starting in the fourth quarter.”
Elevated Inflation Adds Complexity
Even as “the darkening trade skies heavily threaten the growth outlook,” BMO chief economist Douglas Porter says the Bank of Canada is still watching rising prices.
Iran-war-linked energy prices remain elevated, and Canadian tariffs on US imports could further stoke inflation, Porter says. Canada’s Consumer Price Index rose to 3.0% in July from 2.8% in the month before, due to renewed fighting in the Iran war. Month-over-month core CPI, excluding food and energy, advanced to 1.9% from 1.8% the prior month.
Economists Watch for Shifts in the Bank’s Tone
Josh Nye, senior economist at RBC Global Asset Management, expects no change in the Bank’s messaging at the upcoming meeting “with the situation remaining so fluid.” He regards the current policy rate of 2.25% as already accommodative, precluding any possibility for a signal to ease rates further.
Others expect the bank to signal a shift toward monetary easing. “The Bank of Canada’s bias is likely to be toward lower rates in the near term,” says Oxford Economics’ Stillo. “If economic weakness prevents businesses from passing higher tariff-related costs onto consumers, we believe the Bank of Canada stands ready to temporarily lower the policy rate below 2% in the first half of 2027.”
