Bank of Canada Holds Fire as Trade War Escalation Adds to Inflation Pressures

The Bank of Canada is expected to keep borrowing costs steady on Wednesday, despite an escalation in the trade war with the U.S. that threatens economic recovery and adds to inflation risks.

Economists and markets anticipate policymakers led by Governor Tiff Macklem to maintain the policy rate at 2.25%, marking the seventh consecutive hold. However, the country's relationship with its top trading partner has significantly deteriorated since the last meeting in July.

The White House imposed 50% tariffs on about $20 billion worth of Canadian goods, including electrical equipment, plastics, and plywood. In response, Prime Minister Justin Trudeau's government plans to introduce retaliatory duties on a range of US items starting September 8.

While the cross-border spat has led to name-calling and debates over geographical names, Macklem and his governing council have more pressing concerns. They've been worried about higher gasoline prices from the war in Iran spreading to other goods and services, which has already contributed to a 3% yearly pace of headline inflation for the first time since 2023.

Despite this, economists at Royal Bank of Canada believe that the heightened growth risks and inflation pressures may not be enough to prompt the Bank of Canada to adjust interest rates. 'The bank has established quite a high bar to move in either direction,' said Jimmy Jean, chief economist at Desjardins.