Key Takeaways
- Canada’s retaliatory tariffs against the US will likely add modestly to inflation.
- The trade war will likely dent economic growth but not send it into a spiral.
- Analysts say the Bank of Canada is likely to keep rates steady as the trade war unfolds.
The United States/Canada trade war may represent a major breakdown in relations between the countries, but analysts say it will likely make ripples rather than waves in the Canadian economy. Economists say inflation will likely tick higher as a result of US tariffs, while economic growth slows amid the uncertainty. Overall, they say the impact probably won’t be enough to sway the Bank of Canada’s interest rate decisions.
The import ban imposed by US President Donald Trump will affect 68 Canadian products, including select alcoholic beverages, dairy products, and motorcycles. It’s scheduled to take effect on Sept. 29. These products collectively represented less than 0.3% of US imports from Canada in 2025.
“This marks an escalation, but with a 50% tariff on these products, many were already likely too expensive for US importers to buy,” wrote Nathan Janzen, assistant chief economist at Royal Bank of Canada, in a note to investors. “Therefore, the marginal impact of the change on the Canadian economy is likely relatively small.”
Trump’s latest move followed Canada’s retaliatory tariffs against the US, which kicked in early Tuesday morning. Economists expect Canada’s counter-tariffs to push inflation slightly higher while weighing modestly on economic growth.
Relatively Small Inflation Impact
Douglas Porter, chief economist at BMO Economics, says the counter-tariffs will add 0.2-0.3 percentage points to Canada’s Consumer Price Index—likely not enough to drive the Bank of Canada’s next rate decision on Oct. 28. Part of the reason analysts expect only a modest uptick in inflation is their belief that higher prices may not be fully passed along to end consumers.
The inflationary impact from Canada’s counter-tariffs “should turn out to be much lower in reality, given that the weak demand environment has made firms reluctant to integrate higher costs into their prices over the past year,” says Bradley Saunders, North America economist at Capital Economics. He points to Canada’s retaliatory duties imposed on roughly C$60 billion of US imports last year, saying they have only boosted inflation by 0.3 percentage points.
Bank of Canada to Watch Inflation
The Bank of Canada will weigh the inflationary effect of new Canadian tariffs as it calibrates policy. Canada’s economy is already grappling with higher inflation from the renewed Middle East hostilities—a key concern policymakers underscored at their last meeting while holding the policy rate steady at 2.25%.
BMO’s Porter cautions: “Any additional upward pressure on underlying inflation, regardless of its source, can add to the chances of the Bank of Canada raising rates at some point in the next year.”
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets, says even a small addition of 0.1-0.2 percentage points to inflation “may push the Bank of Canada to become marginally more hawkish,” tilting toward raising rates to fight inflation.
Canada’s July inflation data showed signs of reheating, as the CPI rose to 3.0% from 2.8% in June. Month-over-month core CPI, excluding food and energy, climbed to 1.9% from 1.8% the prior month.
Growth Outlook Draws Concern
While the direct drag on growth from the counter-tariffs is expected to be modest—driven by a loss of purchasing power from the higher inflation—a protracted trade war casts a shadow on Canada’s economic prospects. “The broader trade situation remains at a standstill, leaving a large cloud of uncertainty over the Canadian economy,” says Desjardins’ Mendes.
The prospect of continued retaliation from both sides poses a significant threat to Canada’s growth, according to BMO’s Porter. “I am a bit surprised at how unconcerned Bank Governor Macklem seemed about the growth impact from the trade battle in last week’s press conference,” he adds.
Canada’s gross domestic product rebounded in the second quarter, growing 3.3% on an annualized basis from 0.3% in the first quarter. “The longer the two sides spend arguing over ‘tit for tat’ tariffs, the further this will delay much-needed CUSMA [Canada-United States-Mexico Agreement] negotiations and weigh on business investment,” Capital Economics’ Saunders says.
