Key facts
- The Bank of Canada is expected to hold its key policy rate at 2.25% on Wednesday.
- Canada's economy grew 3.3% in the second quarter, exceeding forecasts.
- New U.S. tariffs on Canadian goods and Canada's retaliatory duties create trade risks.
- Inflation is at the top of the Bank of Canada's control range, while core inflation is near target.
- The unemployment rate reached a two-year low of 6.4% in July.
The Bank of Canada is widely expected to maintain its key policy rate at 2.25% on Wednesday, as robust second-quarter economic growth provides a stable backdrop. The economy expanded at a 3.3% annualized rate, surpassing the central bank's forecast, driven by stronger exports and domestic demand, including business investment and household spending.
However, this positive momentum faces headwinds from escalating trade tensions. New U.S. tariffs on approximately $20 billion of Canadian goods, which took effect last month, are set to be met with retaliatory Canadian duties next week. These conflicting forces leave the Bank of Canada with little immediate reason to alter borrowing costs.
Economists, including Randall Bartlett of Desjardins Group, suggest that moving rates now would be premature before understanding the lasting impact of the tariffs. While inflation has risen to 3% due to higher gasoline prices, the central bank's preferred core inflation measures remain near the 2% target. Higher energy prices and retaliatory tariffs pose upside inflation risks, while weaker exports and investment due to the trade war could pressure prices downward.
All 35 economists surveyed by Reuters anticipate no change in interest rates, a view echoed by money markets pricing in a 94% probability of the Bank of Canada holding steady. The labor market has also shown strength, with the unemployment rate falling to a two-year low of 6.4% in July, though it remains historically high. Analysts caution that the second-quarter rebound was partly influenced by temporary factors such as the restart of auto plants after shutdowns, higher oil prices, government support, and the soccer World Cup.