Tariffs Cloud Bank of Canada Rate Outlook as Overnight Rate Holds Steady

The Bank of Canada's decision to keep its overnight rate steady at 2.25% since October 2025 has been widely expected, but a recent breakdown in tariff negotiations between Canada and the US has raised questions about whether this trend will continue.

The introduction of new 50% tariffs on Canadian exports, on top of existing tariffs, has moved Canada's average effective tariff rate to approximately 6% from around 3%. This move targets specific sectors such as plastic products, electrical machinery, furniture, and wood products, which are expected to be hardest hit.

RBC Economics estimates that the economic impacts will be felt more in Quebec, BC, and Ontario, where Canadian exporters will face substantially fewer alternative markets than their American counterparts. According to RBC, 'purchases of these products from Canada would be prohibitively expensive' under the new 50% rate.

The bank's analysis also notes that while the size of the tariffs is likely not large enough to derail Canada's economic growth backdrop, more than 80% of Canadian exports continue to move duty-free under the Canada, United States, Mexico Agreement (CUSMA). However, even with this fact in mind, RBC does not expect the bank to cut its rate in response to the new tariffs.

Instead, RBC suggests that targeted fiscal support, rather than blanket monetary easing, is better suited to cushion affected industries. The bank also notes that intensifying trade uncertainty and a recent moderation in underlying inflation have raised the probability that the Bank of Canada will not raise rates in 2026.