The Bank of Canada left its key rate at 2.25% in September, marking a seventh straight hold and keeping policy below a recent peak of 5%. The statement was blunt: "The upside risks to inflation have increased, while new tariffs make growth prospects more uncertain." The bank also cautioned that additional U.S. duties could put the sustainability of Canada's recovery at risk.
Two forces are doing most of the damage. Inflation is being fanned by rising energy costs linked to continued hostilities in the Middle East. And a fresh tariff crossfire, following the collapse of U.S. trade negotiations, is weighing on growth.
U.S. President Donald Trump rolled out 50% tariffs on a broad range of Canadian goods. Ottawa countered with retaliatory measures that take effect Sept. 8, covering more than $20 billion in products.
In rates markets, the Canada 1 Year Bond was yielding 2.775% at 12:13 PM EDT, up 0.085 on the day. Headline inflation quickened to 3% year over year in July from 2.8% in June, which has traders penciling in three BoC hikes over the next 12 months. Even so, Bank of America expects the central bank to stay on hold in the coming months.
"Trade uncertainty has risen as the trade war with the US has just escalated, which will likely weigh on growth, and core inflation is at the 2% target. We expect only a direct impact from tariffs on inflation, without second-round effects," Carlos Capistran, an economist at Bank of America, wrote Tuesday. He added, "A firmer 2Q and above-target headline inflation argue for caution, but the escalation of the trade war with the US is the more consequential development for monetary policy, in our view."
When headlines and policy discussions dominate attention, steady investing matters, so grab the free Always Be Buying E-Book to start building wealth
Goldman Sachs estimates Trump's tariffs will shave 0.3 percentage point off GDP growth and add 0.3 percentage point to inflation in Canada. "These downside growth concerns and continued volatility in trade tensions will likely keep the BoC on hold for the foreseeable future," the firm said in an Aug. 28 note.
The Canadian economy grew 0.8% in the second quarter after a 0.1% rise in the first. Markets anticipate that the BoC will raise interest rates at some point within the next 12 months. Meanwhile, headline inflation moved up to 3% in July, and the bank's own message stressed how tariffs and energy are complicating the path forward.
"The BoC is in a wait-and-see mode, but that doesn't mean it's standing still", Michael Constantino, CEO of WeBull Canada, said after the decision. He said Governor Tiff Macklem was "threading a difficult needle, with inflation running above target on energy price volatility even as fresh U.S. tariffs threaten to slow a second-quarter economy that grew at its fastest pace in three years." Constantino called the hold "a deliberate pause for information." "The next real test will come as the effects of retaliatory tariffs and elevated crude prices begin to show up more clearly in the economy," he said.
For anyone budgeting, borrowing, or saving, the mix to watch is simple even if the policy math is not: tariffs, energy prices, and inflation. Those are the dials the BoC is watching as it decides what comes next.