Bank of Canada Expected to Remain On Hold as Trade Conflict With U.S. Escalates
Dow Jones2026/09/01 11:01By Paul Vieira
OTTAWA--The Bank of Canada is widely expected to keep its main interest rate unchanged on Wednesday as policymakers assess the fallout from a stark deterioration in Ottawa-Washington trade ties.
All 12 economists surveyed last week by The Wall Street Journal predict the Bank of Canada will hold its target for the overnight steady for a seventh straight decision, at 2.25%. The economists said they don't anticipate central bank officials to overreact after the collapse of trade talks last month between the U.S. and Canada.
The fraying of economic and diplomatic ties between the neighboring countries poses yet another headwind for Canada, which recent data indicated had perhaps turned the corner after a trade-uncertainty-induced period of stagnant activity.
New hefty Trump administration tariffs, Canada's planned retaliatory response, and the threat of potentially crippling U.S. duties on Canada's motor vehicles and parts starting Jan. 1 has roiled the Canadian public and business owners.
Significant hits in consumer and business confidence in the weeks ahead could be in the offing.
"Emotions are running very high on both sides of the border; emotions make for lousy forecasts," said Derek Holt, economist at Bank of Nova Scotia.
Data show Canada's economy recorded a stellar performance in the second quarter, with 3.3% annualized growth marking the biggest increase in output in over three years. Expansion was broad-based, and powered by exports, household spending and a recovery in business investment. On a one-year basis, real gross domestic product rose 1.2% in the second quarter, relative to flat 12-month growth in the prior three-month period.
For some economists, the case for rate increases had been building, based on growth surpassing Bank of Canada expectations and worries about higher energy prices spreading to other goods. "The trade war escalation has derailed it," said Sébastien Mc Mahon, chief economist at iA Financial Group.
The minutes from July's rate-policy decision indicated that senior officials harbored doubts about whether the momentum unfolding in the second quarter had staying power. Statistics Canada said its early estimate for GDP in July indicated the economy stalled, which sets the stage for slower growth in the third quarter.
"Had we not seen trade-conflict escalation, there still would have been a long runway before the latest pickup in growth would have compelled a rate hike," said Avery Shenfeld, chief economist at CIBC Capital Markets, citing excess capacity in the economy.
Of the economists surveyed, only Holt from Scotiabank said there would be a rate increase by the end of 2026, arguing that slack would be absorbed at a faster-than-expected pace. Seven economists predicted rate increases during the first half of 2027 while two analysts tabbed the second half of next year--although some of these forecasts are contingent on no further escalation in the U.S.-Canada trade conflict. Two economists expect the Bank of Canada to be on hold until 2028.
Economists add that trade tensions complicate the Bank of Canada's main focus, which is to ensure inflation hits and remains at 2%. Energy prices remain elevated, and crude oil prices jumped this week after the U.S. resumed attacks on Iran. And the effects of Canadian retaliatory tariffs of between 15% and 50% on $20 billion of U.S. imports could add anywhere between 0.2 and 0.5 percentage points to headline inflation, the economists surveyed said.
"The Bank of Canada must prioritize managing price pressures over growth concerns when the two are in conflict," said Royce Mendes, head of macro strategy at Desjardins Group. "To support growth, policymakers are expected to remain on the sidelines." Headline inflation sits at the top end of the central bank's 1% to 3% target range, although core prices--which strip out food and energy--are near 2%.
Write to Paul Vieira at paul.vieira@wsj.com
(END) Dow Jones Newswires
September 01, 2026 07:01 ET (11:01 GMT)
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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