Bank of Canada Holds Steady on Overnight Rate Amid Trade War Uncertainty

The Bank of Canada is widely expected to keep its overnight rate at 2.25%, marking the seventh consecutive hold, according to National Bank of Canada's Taylor Schleich and Ethan Currie. The economists argue that markets are still overpricing late-2026 hikes, with risks skewed toward a Canadian Dollar-supportive rally in Government of Canada bonds versus U.S. Treasuries.

Escalating U.S. trade policy and retaliatory tariffs have tilted the balance of risks toward a more cautious stance, according to Schleich and Currie. While investors appear to view a resolution of the conflict as likely, they believe that markets still assign too much weight to near-term hikes, leaving room for a post-decision rate rally.

The economists note that the Bank's policy rate was higher at 3% when it cut rates last March and that citing monetary policy limitations and emphasizing data dependence could be a strategy employed this week. They also suggest that if the trade war intensifies further and the economy stalls, the Bank may respond with a similar timeline to its previous cut in September.