The Bank of Canada decided this month to keep the overnight rate unchanged at 2.25%, marking the seventh consecutive time it held steady. The latest summary of the review shows that officials believe the economy has a more solid foundation before the latest round of tariffs, but are concerned that trade war uncertainties and inflation risks could weaken growth momentum. According to the central bank’s review summary, officials acknowledged that the annualized economic growth rate for the second quarter was 3.3%, slightly above expectations, indicating a rebound after flattening growth last year. However, the council unanimously agreed that major economic risks have increased since the release of the July monetary policy report. Recent conflicts have erupted again in the Middle East, with global energy prices remaining high, causing Canada’s inflation rate to stay above the 2% target longer than expected, increasing the risk that gasoline price increases will spread to other goods and services, potentially escalating into broad inflation.
The summary points out that the new round of Section 338 tariffs could undermine business and consumer confidence, thereby affecting consumer spending, business investment, and hiring, thereby more broadly suppressing economic growth. Broken trade negotiations, the implementation of new tariffs, and threats of further trade measures have made the growth outlook even more uncertain. However, officials say that economic weakness caused by tight trade may suppress the transmission effect of rising energy prices, thereby controlling inflationary pressures. They also believe that despite the expansion of growth, the economy remains in a state of oversupply and the labour market remains weak. The review summary states that the economic and inflation trends are basically in line with the forecasts in the July monetary policy report, so the Board has decided to keep the policy rate unchanged at 2.25%. After the announcement of this decision, August data showed inflation rates remained at 3% year-on-year, and the growth in gasoline and food prices slowed.
This summer, Canada’s inflation rate has been high for about four consecutive months, with 3.2% in May and 2.8% in June. Before this rate decision, US-Canada trade talks broke down at the end of August. Prime Minister Carney believes that the U.S. demands made at the last moment threaten Canada’s economy and sovereignty, and demanded that negotiators return to Ottawa. Central bank officials stated that, amid escalating US-Canada trade tensions, they will monitor whether the economic recovery can be sustained and whether energy inflation will be transmitted to other goods and services. Economists expect that as long as global oil prices remain high, gasoline prices will continue to push up consumer costs, and inflation will stay above the 2% target. Bank of Canada Governor Tiff Macklem has repeatedly stated in recent months that the bank remains committed to keeping inflation at the 2% target and continues to serve as a “source of stability” for Canadians.
However, he did not make any predictions about future rate cuts or increases. At a press conference following the rate announcement on September 2, McCollum said that the data received since the last decision was roughly in line with forecasts, but risks are shifting, and the central bank is prepared to adjust monetary policy as needed. The market generally expects that the next decision on October 28 will once again keep the benchmark interest rate unchanged and simultaneously release the quarterly monetary policy report.