Bank of Canada mulls Trump tariff shock as it holds interest rates

The central bank decided to hold its key rate at 2.25% at its September meeting, it announced Wednesday, despite citing high energy prices and the elevated uncertainty surrounding trade talks.

U.S. President Donald Trump’s new trade war against the U.S.’ second-biggest trading partner includes 50% tariffs on a wide range of Canadian goods. Canada has announced retaliatory tariffs, due to take effect on Sept. 8 and impacting more than $20 billion in goods.

“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 in a note after the decision.

He added the bank’s 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 added.

The most recent figures show headline consumer inflation accelerated to 3% year-on-year in July, up from 2.8% in June, prompting traders to price three BoC rate hikes over the coming 12 months. But BoA expects the BoC to keep rates on hold over 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,” Bank of America economist Carlos Capistran wrote in a Tuesday note.

“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,” said Capistran.

Goldman Sachs forecasts a 0.3 percentage point headwind to GDP growth and 0.3 percentage point boost to inflation in Canada as a result of Trump’s tariffs.

“These downside growth concerns and continued volatility in trade tensions will likely keep the BoC on hold for the foreseeable future,” the bank wrote in an Aug. 28 note.