The Bank of Canada (BoC) decided to keep its benchmark policy rate at 2.25% at its meeting on Wednesday, in line with market analysts’ consensus expectations. The decision marked the 11th consecutive month that the lending rate has been left unchanged, despite the economic environment facing uncertainty from the escalating tariff dispute with the United States (U.S.).
The central bank warned that the risk of rising inflation is now growing following the implementation of 50% tariffs by U.S. President Donald Trump on selected Canadian imports. In addition, Ottawa’s move to enforce retaliatory tariffs of the same value next week is feared to increase the burden on business operating costs and push consumer prices higher.
Despite the trade threats, the Canadian economy has shown strong resilience as second-quarter Gross Domestic Product (GDP) rose at an annual rate of 3.3%. The domestic labour market has also been reported to remain stable, providing a supportive foundation for domestic economic stability before the wave of import restrictions begins.
The BoC is now on alert as two opposing macroeconomic risks collide. US import restrictions risk dampening domestic economic growth and business sentiment, while Canada’s retaliatory tariffs have the potential to reignite the flames of barely-diminished inflation.
Economists say the Bank of Canada’s wait-and-see approach is the most rational course of action at this time. Holding rates allows policymakers to assess the true impact of supply chain disruptions and cross-border tariffs on the economy before making any decisions on easing or tightening borrowing costs.
