Trade Tensions Trump Rate Hikes at the Bank of Canada

The Bank of Canada is expected to keep interest rates unchanged on September 2 due to escalating trade tensions with the United States, which threaten to weaken economic growth. According to Bank of America, the central bank will maintain a cautious approach and leave its policy rate at 2.25%, even if the US Federal Reserve raises rates during that period.

While Canada's economy showed signs of recovery in the second quarter with 75,100 jobs added in July and an unemployment rate falling to 6.4%, underlying inflation remains around the BoC's 2% target. Headline inflation accelerated to 3% year-on-year, largely due to gasoline prices.

Bank of America economist Carlos Capistran stated that the escalation in the trade war is the more important development for monetary policy, as tariffs as high as 50% in both directions are expected to weigh on growth. The bank expects no significant second-round effects from tariffs on inflation and believes that uncertainty remains high.

Markets currently price roughly three BoC rate hikes over the next 12 months, but Bank of America disagrees, expecting no moves and even a rate cut more likely than a hike if trade tensions continue to intensify.