35 of 35 Economists See Bank of Canada Holding Rates as U.S. Trade War Clouds Growth

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A remarkably unified interest-rate call is emerging just as Canada’s economic outlook becomes unusually difficult to read. All 35 economists polled by Reuters expect the Bank of Canada to keep its overnight rate at 2.25% on September 2, balancing inflation that remains near the top of its target range against renewed economic risks from the escalating U.S. trade conflict.

The timing makes the decision especially delicate. Canada has just reported surprisingly strong second-quarter growth and a healthier July labour market, yet new American tariffs and Canadian retaliation threaten to weaken that momentum. For policymakers, neither cutting nor raising rates offers an obvious advantage. Holding steady gives the Bank something increasingly valuable in an economy being pulled in opposite directions: more time to see which pressure proves stronger.

A Rare 35-to-35 Consensus Has Formed

Unanimity among economists is striking because the economic backdrop is anything but straightforward. Every one of the 35 economists participating in Reuters’ latest poll expects the Bank of Canada to leave the overnight rate at 2.25% at its September 2 meeting. The consensus extends well beyond one decision. The median forecast sees the policy rate remaining unchanged for the rest of 2026 and through the third quarter of 2027. That would represent an unusually long period of stability after several years in which households and businesses became accustomed to rapid shifts in borrowing costs.

The longer-term picture is less settled. Reuters found that 47% of economists who answered an additional question expect at least one rate increase by the end of the second quarter of 2027. The median forecast eventually puts the overnight rate at 2.50% in the fourth quarter of next year. That distinction matters. Economists are not necessarily saying the Bank has finished adjusting rates permanently. Rather, they see little reason for Governor Tiff Macklem and his colleagues to move before the economic consequences of tariffs, inflation and recent growth become easier to separate.

The 2.25% Rate Is Becoming the Bank’s Middle Ground

The Bank of Canada has kept its policy rate at 2.25% since October, giving policymakers a relatively long period to observe how previous monetary easing is flowing through the economy. At its July 15 decision, the Governing Council concluded that the existing rate remained appropriate to support the recovery while gradually returning inflation toward the 2% target. That assessment came with unusually strong caveats, however, because both the conflict in the Middle East and U.S. trade policy were creating risks that could move inflation and growth in opposite directions.

That helps explain why 2.25% currently functions as a middle ground. A rate cut could provide additional support to investment, housing and indebted consumers, but it could also become difficult to justify while headline inflation is elevated. A rate increase might help contain price pressures, yet tightening borrowing conditions while exporters face new tariffs could unnecessarily weaken employment and business spending. The Bank’s July deliberations explicitly acknowledged both possibilities: stronger-than-expected growth could add inflation pressure, while a stalled export recovery could suppress hiring and prices. For now, staying put preserves flexibility.

Inflation at 3% Makes Another Rate Cut Difficult

Canada’s July inflation figures provided one of the clearest arguments against rushing into another reduction. Consumer prices were 3.0% higher than a year earlier, accelerating from 2.8% in June and reaching the upper boundary of the Bank of Canada’s 1% to 3% inflation-control range. Transportation prices were particularly strong, climbing 7.8% year over year, while grocery prices increased 3.1%. Shelter inflation was considerably softer at 1.3%. For families watching everyday expenses rather than economic models, the combination still means that several highly visible bills remain more expensive than they were a year ago.

The Bank nevertheless has reasons not to react mechanically to the headline number. Its July assessment emphasized that much of the earlier inflation acceleration reflected gasoline and other energy-related pressures associated with the Middle East conflict. Inflation excluding gasoline had been much closer to target, while underlying measures remained relatively stable. Policymakers therefore face a familiar central-bank problem: determining whether a price increase is temporary or likely to spread. Cutting rates while inflation is at 3% could look premature; raising them because of energy-driven inflation could hurt an economy already facing a trade shock.

Canada’s 3.3% GDP Rebound Changed the Conversation

The growth figures released August 28 made an immediate rate cut even harder to argue. Canada’s economy expanded at a 3.3% annualized pace during the second quarter, its fastest quarterly growth rate since 2023. First-quarter growth was also revised upward to 0.3%, meaning Canada avoided the two consecutive quarterly contractions commonly associated with a technical recession. The second-quarter result comfortably exceeded the Bank of Canada’s July projection of 2.5%, giving policymakers evidence that the economy entered the latest trade confrontation from a stronger position than previously thought.

The details were encouraging as well. Exports rose 3.6%, their largest increase in more than three years, while final domestic demand increased 1%. Household consumption grew 0.8%, its strongest performance in three quarters, and business investment advanced 2.3% after contracting 1.3% previously. Yet the numbers also contain a warning. Statistics Canada’s preliminary estimate indicated that economic activity was roughly flat in July. More importantly, much of the second-quarter export strength occurred before the newest U.S. tariffs arrived. The Bank therefore has to decide how much weight to place on strong backward-looking data when the forward-looking trade environment has deteriorated.

The Labour Market Is Holding Up Better Than Feared

Canada’s employment picture has also given the Bank room to wait. Employment increased by 75,000 in July, a 0.4% monthly gain, while the national unemployment rate edged down from 6.5% to 6.4%. The improvement was not concentrated in a single corner of the economy. Wholesale and retail trade added 21,000 positions, finance and real estate gained 18,000, professional and technical services added 17,000, and construction employment increased by 16,000. Ontario alone recorded an employment gain of 52,000, while British Columbia added 18,000 jobs.

Those figures hardly describe an economy requiring an emergency monetary boost. At the same time, a 6.4% unemployment rate still leaves meaningful slack, and the most important employment question may concern what happens after the latest tariffs filter through manufacturing and export-dependent industries. The Bank’s Financial Stability Report has repeatedly identified a sharp increase in unemployment as one of the biggest threats to heavily indebted households. That creates another reason to avoid moving too early. If tariff-sensitive employers begin cutting production and payrolls, the case for easier monetary policy could return quickly even if today’s employment numbers appear relatively healthy.

The U.S. Trade Fight Is Now the Biggest Growth Wild Card

The most important change since the Bank’s July decision came from Washington and Ottawa rather than domestic economic statistics. The United States imposed 50% tariffs on C$27.6 billion worth of Canadian goods effective August 22 after the latest negotiations broke down. Ottawa responded by announcing matching tariffs covering C$27.6 billion of U.S. imports, with rates of 15%, 25% and 50% scheduled to take effect September 8. Targeted sectors include steel, dairy, appliances, agricultural equipment, pulp and paper, electronics, furniture and clothing.

Ottawa has also unveiled C$7.5 billion in additional and enhanced support for affected workers and businesses. Measures include C$1.5 billion for regional tariff assistance, C$500 million in additional Business Development Bank liquidity, C$2 billion through the Canada Strong Diversification Fund and C$3.5 billion in rapid-response support for workers and employers. Those measures can cushion part of the blow, but they cannot eliminate the uncertainty created when companies no longer know what cross-border access will look like six or twelve months ahead. Reuters’ economist poll suggests the prevailing view is that the latest tariff escalation represents a larger threat to Canadian growth than an immediate source of broad inflation.

A Weaker Canadian Dollar Adds an Inflation Complication

Trade uncertainty does not affect the Bank only through exports and employment. It can also work through the Canadian dollar. The loonie weakened as negotiations with Washington deteriorated, trading around C$1.38 per U.S. dollar during the latest escalation. A softer currency makes imports priced in U.S. dollars more expensive in Canadian-dollar terms, creating another possible pathway through which trade tensions could eventually show up in consumer prices. Economists participating in the Reuters poll specifically highlighted currency weakness as a potential inflation concern.

That leaves the Bank dealing with an awkward combination. The same trade dispute that could reduce factory output, exports and hiring may simultaneously create upward price pressure through exchange rates, tariffs and supply-chain costs. Conventional monetary policy works most cleanly when inflation and economic growth are moving together. It becomes harder when they diverge. Cutting rates to protect employment could put additional downward pressure on the currency, while raising rates to defend against inflation could deepen an export-sector slowdown. A stable 2.25% rate effectively avoids choosing between those risks until incoming data reveal which one is becoming more important.

For Households, A Hold Brings Stability Rather Than Immediate Relief

For indebted Canadians, an unchanged overnight rate would mean another period without the large swings in borrowing costs that characterized the earlier inflation cycle. The Bank of Canada says most mortgage borrowers who faced higher payments at renewal during 2025 and the first half of 2026 have managed the adjustment. More than 90% of borrowers who renewed during the year leading up to its latest Financial Stability Report received rates below the levels at which they had originally qualified under the mortgage stress test. Delinquency indicators have also broadly stabilized rather than surging.

That resilience does not mean household finances are comfortable. The Bank continues to describe Canadian household indebtedness as elevated, and highly leveraged families have less room to absorb a job loss or an unexpected expense. About 1.3% of mortgage holders were at least 60 days behind on one or more forms of debt in the Bank’s latest assessment, compared with roughly 2.5% of borrowers without mortgages. The final major wave of pandemic-era mortgage renewals is expected to pass over the next year. Keeping the policy rate steady would provide some predictability as those households complete that transition.

The Next Move May Depend More on Trade Than September’s Decision

The September 2 announcement increasingly looks like the easy decision. What happens afterward is far less certain. The Bank’s July projections anticipated inflation gradually returning toward 2% in early 2027 as temporary cost pressures faded and economic slack restrained price growth. If that process unfolds while the trade confrontation weakens exports and business investment, policymakers could remain on hold for considerably longer. If unemployment begins climbing sharply, the conversation could even turn back toward rate reductions despite the current economist consensus.

The opposite scenario is also plausible. Second-quarter growth has already exceeded the Bank’s forecast, July employment was strong, and a weaker Canadian dollar could add to imported inflation. If domestic demand remains resilient and inflation proves stubborn, the Bank may eventually need to tighten. That explains why nearly half of the economists who gave Reuters a longer-term view anticipate at least one increase by mid-2027 and why the median forecast reaches 2.50% later next year. For now, 35 economists have reached the same conclusion: amid conflicting signals from growth, prices and Canada’s largest trading partner, waiting carries fewer risks than guessing which shock will dominate next.

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