Bank of Canada Faces Renewed Trade War Pressures Ahead of Interest Rate Decision

The Bank of Canada is facing renewed trade war pressures that may impact its interest rate decision on Wednesday. The central bank has kept its benchmark rate at 2.25% for nearly a year, but recent tariff volleys have changed the economic context.

Economists expect the Bank of Canada to stick to the status quo and hold its policy rate steady due to uncertainty surrounding the trade war. 'The bank has been hesitant to make a move on rates that they might have to retrace later,' said Tony Stillo, director of Canada economics at Oxford Economics.

Financial market odds for a seventh straight hold in the policy rate stand at 99% as of Friday afternoon, according to LSEG Data & Analytics. The Bank of Canada's governor, Tiff Macklem, had warned that any tightening of trade restrictions between Canada and the US might push monetary policymakers to ease the policy rate.

Despite recent growth data showing a strong second-quarter GDP, forecasts expect the economy to slow down in the second half of the year. BMO chief economist Doug Porter said it's possible for both sides to de-escalate in the months ahead, but absent a return to the negotiating table, he expects the third quarter to look much like the early days of the trade war in 2025.