Bank of Canada holds rates as tariffs cloud growth outlook

By Erik Hertzberg

(Bloomberg) — The Bank of Canada held interest rates steady for a seventh consecutive meeting as an escalation in the trade war with the U.S. threatens growth and creates the risk of new inflation pressures.

Officials led by Governor Tiff Macklem kept the overnight rate at 2.25% on Wednesday, matching the expectations of economists in a Bloomberg survey and traders in swap markets.

Policymakers are keeping short-term borrowing costs stable as they weigh the uncertainty posed by the tariff spiral between two longtime allies that have been sparring over trade since President Donald Trump returned to the White House last year.

While the economy and inflation are “evolving broadly” in line with the central bank’s July projections, “the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain,” the bank said in a statement.

The suite of communications suggest that officials see inflamed trade tensions adding to worries about elevated energy prices from the war in Iran. U.S. and Canadian tariffs are likely to filter through to consumer prices — and though the trade woes are creating headwinds for business, the bank sees the economy at a solid starting point.

“Economic growth in Canada has picked up after stalling over the past year. That puts us on a stronger footing as we face new challenges,” Macklem said in the prepared text of opening remarks for his press conference. “But uncertainty about the sustainability of the rebound has increased with new U.S. trade actions.”

Short-term bonds sold off, sending the two-year Canadian yield as high as 3.048%, while the loonie strengthened to C$1.3867 per U.S. dollar as of 10:06 a.m. in Ottawa.

The relationship between the U.S. and Canada has markedly worsened since Aug. 21, when weeks of talks on a deal to reduce tariffs and trade barriers collapsed. The Trump administration put 50% duties on hundreds of products from Canada, and Prime Minister Mark Carney’s government has responded with a list of hundreds of U.S. items that will be hit with counter-tariffs starting Sept. 8.

The central bank has already spent much of the year worried that higher fuel prices from the war in the Middle East might spread to other goods and services in the economy. The spike in energy costs sent headline inflation to a 3% yearly pace for the first time since 2023 — though core price pressures remain subdued, holding around the bank’s 2% target.

Now, the trade war is adding additional price risks. Previous research from the central bank suggests Canada’s retaliatory tariffs will add to inflation.

“When the bank does make a rate change, it affects the economy for up to the next two years. And they don’t want to be cutting and then raising and creating more uncertainty by their own policy actions, so I think they’ll be very measured in what they do,” Tony Stillo of Oxford Economics said on BNN Bloomberg Television.

The economy rebounded sharply in the second quarter, rising at a 3.3% annualized pace after nearly a year of stagnation and driven by investment, exports and household consumption. The job market has tightened. But a further intensification of trade tensions would be a major headwind for sales, hiring and investment.

The potential combination of inflation and slower growth posed by the tariff war revives a dilemma Macklem and his governing council have highlighted throughout the trade war. The central bank can’t cut borrowing costs to help the economy adjust to the structural trade damage without risking a further stoking of price pressures.

In a Bloomberg poll, 63% of analysts said they expect the bank to hike in the first half of 2027, matching market pricing in overnight swaps.

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