The Bank of Canada is keeping interest rates on hold amid expectations of slower growth and higher inflation thanks to retaliatory tariffs imposed by the United States following the collapse of trade negotiations.
The Bank of the Middle East announced on Wednesday that it had decided to keep its key policy interest rate unchanged at 2.25% at its September meeting, citing soaring energy prices due to ongoing conflicts in the Middle East.
“Upside risks to inflation are increasing, while new tariffs make the growth outlook even more uncertain,” the central bank said in a statement.
Additional U.S. tariffs could jeopardize the sustainability of Canada’s economic recovery, it added.
President Donald Trump’s new tariffs on the United States’ second-largest trading partner include 50% duties on a wide range of Canadian products. Canada has announced retaliatory tariffs that are scheduled to take effect on September 8 and will affect more than $20 billion of goods.
The central bank is expected to raise interest rates over the next 12 months.
The central bank’s decision marks the seventh consecutive decision to keep interest rates unchanged, and is down from a recent peak of 5%. Canada’s economy grew by 0.8% in the second quarter, up from 0.1% in the first three months of the year.
“The central bank is in wait-and-see mode, but that doesn’t mean it’s standing still,” Weeble Canada CEO Michael Constantino said in a note after the decision.
He added that the bank’s president, Tiff Macklem, is “threading a difficult needle as inflation remains above target on volatile energy prices, even as new U.S. tariffs threaten to slow the economy in the second quarter, which grew at its fastest pace in three years.”
Constantino called the hold “an intentional pause for information.” “The next real test will come when the effects of retaliatory tariffs and high oil prices start to become more evident in the economy,” he added.
Latest figures show headline consumer inflation accelerated to 3% year-on-year in July from 2.8% in June, with traders pricing in three BoC interest rate hikes over the next 12 months. However, the central bank expects the central bank to keep interest rates on hold in the coming months.
“The trade war with the U.S. has just intensified, increasing trade uncertainty and is likely to weigh on growth, with core inflation reaching our 2% target. We expect only the direct impact on inflation from the tariffs and no second-order impacts,” Bank of America economist Carlos Capistran said in a note Tuesday.
“While the strong second quarter and above-target headline inflation are alarming, in our view the escalation of the trade war with the United States is a more significant development for monetary policy,” Capistran said.
Goldman Sachs predicts there will be a 0.3 percentage point headwind to Canada’s gross domestic product (GDP) growth and a 0.3 percentage point boost to inflation as a result of President Trump’s tariffs.
“These downside growth concerns and the continued volatility of trade tensions will likely cause the central bank to hold policy for the time being,” the bank said in an Aug. 28 note.
