Bank of Canada Expected to Hold Interest Rates Steady Amid Trade Uncertainty

The Bank of Canada is widely expected to hold interest rates steady at its policy meeting on September 2. Futures markets have predicted this outcome with a probability of 99%, suggesting that the central bank's trendsetting overnight interest rate will remain unchanged at 2.25% for nearly a year now.

Recent GDP data showed the Canadian economy grew at an annualized 3.3% in the second quarter, its fastest pace in over three years. However, the Bank of Canada's projections expect economic growth to slow down in the second half of the year due to new tariffs imposed by the US on Canadian goods.

The US placed 50% tariffs on roughly 5% of Canadian exports to America on August 22, and Canada plans to retaliate with its own counter-tariffs starting September 8. Bank of Canada Governor Tiff Macklem has warned that if energy prices lead to inflation elsewhere in the economy, the central bank might be forced to raise interest rates.

On the other hand, Macklem also cautioned that any escalation of a trade fight between Canada and the US could push the central bank to cut interest rates to stimulate the domestic economy. For now, markets expect the Bank of Canada to adopt a wait-and-see approach, assessing the impacts of the new tariffs on the domestic economy.