Bank of Canada set to hold as trade war creates new dilemma for Macklem
By Erik Hertzberg
(Bloomberg) — The Bank of Canada is likely to hold borrowing costs steady, as an escalation in the trade war with the U.S. threatens the economic recovery while adding to inflation risks.
Economists and markets expect policymakers led by Governor Tiff Macklem to keep the policy rate at 2.25% on Wednesday. It would be the seventh straight hold — but the mood surrounding the country’s relationship with its top trading partner has changed dramatically since the last one, in July.
Canada-US ties haven’t felt this strained since the earliest weeks of President Donald Trump’s second term. The White House added 50% tariffs to about $20 billion worth of Canadian goods, including electrical equipment, plastics and plywood. Prime Minister Mark Carney’s government has changed strategy and plans to add retaliatory duties on a range of US items starting Sept. 8.
The cross-border spat descended into name-calling and debates about hydronyms last week, with Trump declaring that on U.S. maps, Lake Ontario will now be known as Lake America. But Macklem and the governing council have more serious concerns.
They’ve spent much of the year worried that higher gasoline prices from the war in Iran could spread to other goods and services. The spike in energy prices 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.
“Heightened growth risks from new U.S. tariffs and inflation risks from high oil prices likely created more discomfort for the Bank of Canada since their last meeting in July, but not enough to push them off the sidelines,” Nathan Janzen and Claire Fan, economists at Royal Bank of Canada, wrote in a report to investors.
Tariffs will add to inflation while weighing on growth, reviving a dilemma Macklem and his governing council have highlighted throughout the trade war.
“The bank has established quite a high bar to move in either direction,” Jimmy Jean, chief economist at Desjardins, said in an interview. “This is a stagflationary shock.”
Adding to the complexity for Macklem and the governing council: Financial conditions have tightened as bond investors react to fiscal and inflation problems in the US and elsewhere. The yield on benchmark Canada 10-year bonds was around 3.74% on Monday, or 36 basis points higher than at the beginning of July.
Retaliation is inflationary
Previous research from the central bank suggests Carney’s retaliatory tariffs will hit Canadian consumers with higher prices. When the government scrapped countermeasures imposed on U.S. goods last year, the bank said a source of inflation had been removed.
Oxford Economics calculated that the new Sept. 8 counter-tariffs, combined with government spending to help affected industries, may add 0.5 percentage points to consumer prices next year, compared with the firm’s baseline forecast.
At their July meeting, policymakers struck an optimistic tone, arguing businesses were starting to adapt to the trade war after a year of stagnant growth.
Data since then showed a rebound, with growth in gross domestic product accelerating to a 3.3% annualized pace in the second quarter, driven by exports, household consumption and business investment. The labour market added more than 180,000 jobs from May through July, and the unemployment rate hit a two-year low.
Policymakers also said they were looking for more evidence of widespread growth across sectors at their last meeting. But the flare-up in trade tensions has clouded the outlook.
In a Bloomberg survey, 13 of 15 economists say a recession this year is unlikely, though nearly two-thirds say they’ve lowered their forecasts for business investment based on recent trade developments. The same proportion see the output gap closing later than previously.
In the poll, 63% of analysts expect the Bank of Canada to hike in the first half of 2027, matching market pricing in overnight swaps.
Macklem and Senior Deputy Governor Carolyn Rogers will hold a press conference with reporters at 10:30 a.m. Ottawa time on Wednesday.
–With assistance from Dana Morgan.
©2026 Bloomberg L.P.
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Last modified: September 1, 2026
