Trade Uncertainty Forces Bank of Canada to Hold Rates

The Bank of Canada held its policy rate at 2.25 per cent on Wednesday, meeting market expectations. However, without the recent developments in trade negotiations, there might have been a compelling case for a hike.

The second-quarter gross-domestic-product growth came in above expectations at 3.3 per cent on an annualized basis. This reversed the first-quarter weakness in GDP and provided evidence that Canada is not in a recession. Business investment grew surprisingly strong, up 9.5 per cent at annualized rates, while consumption rose 3.3 per cent and exports 14.3 per cent.

Despite easing from 3.2 per cent in May to 2.6 per cent in June, headline inflation increased to 3 per cent in July, back at the upper end of the Bank of Canada's 1-per-cent to 3-per-cent control range. However, a big part of that 3-per-cent figure is due to energy prices, without energy, inflation was 2.2 per cent.

The breakdown in Canada-U.S. trade negotiations and the resulting economic uncertainty led to the Bank's decision to hold rates. The United States imposed 50-per-cent tariffs on a range of Canadian goods, and Prime Minister Mark Carney announced dollar-for-dollar retaliatory tariffs. The ultimate impact on prices faced by Canadians is somewhat unclear.

The tariffs imposed by the U.S., our countertariffs, and a continuing trade war will hurt affected Canadian industries and the economy writ large. Non-energy investment in Canada will take a hit as some Canadian firms contemplate holding off on investing until the Trump administration ends or moving their operations south of the border.