Bank of Canada's Rate Decision Clouded by Ongoing Trade War

The Bank of Canada's rate decision on September 2 may be complicated by the ongoing trade war between Canada and the US. The bank had been expected to maintain its current interest rate of 2.25% until at least the end of 2026, but recent developments may have altered this plan.

Canada has announced retaliatory tariffs on the US, which will increase costs for over 700 imported products. This could lead to higher inflation in Canada, potentially above the bank's comfort ceiling of 3%, triggering a rate hike. However, these are not normal times, and the government has introduced a $7.5 billion stimulus package to mitigate the effects of the tariffs.

The package includes interest-free loans for small businesses, as well as extended employment insurance measures to support workers affected by the tariffs. National Bank of Canada strategists Taylor Schleich and Ethan Currie note that if the trade war persists or worsens, the bank's job becomes much harder, and a rate cut may be more likely.