Posthaste: If trade war persists, Bank of Canada’s next move could be a cut

The Bank of Canada will announce its interest rate decision on Wednesday, Sept. 2. Photo by HYUNGCHEOL PARK/Postmedia

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With the recent and dramatic blowup of trade tensions between the United States and Canada, it’s easy to forget that an interest rate decision is just days away.

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The Bank of Canada will announce its rate on Wednesday, Sept. 2, and while a hold is almost certain, the storm brewing between Ottawa and Washington could force an unexpected change in course down the road.

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Most economists expected the central bank to hold its rate steady this year and the trade dispute has just increased that likelihood. It’s the gradual hikes in 2027 that have now come into question.

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“If the trade war persists and/or worsens, the bank’s job becomes much harder,” said National Bank of Canada strategists Taylor Schleich and Ethan Currie in a note Monday.

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Though the 50-per-cent-tariffs on $28-billion worth of Canadian goods imposed Saturday are relatively narrow they could further weaken business confidence. If they remain in place, National estimates 100,000 to 130,000 Canadian jobs could be at risk.

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“Given recent developments, the likelihood of rate cuts has clearly grown,” said the strategists.

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At the same time the central bank may have to deal with inflation rising above its comfort zone of 1 to 3 per cent if Canada’s counter tariffs hike prices.

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Schleich and Currie noted that even though markets took rate cuts off the table when the Iran war started, the Bank of Canada did not.

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Even when oil prices soared, policy makers said that U.S. trade restrictions might make easing necessary. In July, the governing council said it was “prepared to adjust monetary policy as needed.”

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However, the central bank has also long maintained that monetary policy “cannot offset the impacts of a trade war,” and that targeted fiscal support to industries and households is a more effective remedy.

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Finance Minister Francois-Philippe Champagne and a host of other ministers will unveil measures this morning that sources say will be similar to COVID-19 economic support programs in response to the new round of tariffs.

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For now National Bank is keeping its call that the Bank of Canada will begin raising rates in early 2027, but admits the forecast is “fragile.”

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“If the trade war persists … the Bank of Canada’s next move is likely to be a cut with the timing dependent on the evolution of economic and inflation data,” they said.

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Canada has some work to do if the nation is to face a higher tariff environment, say economists with the National Bank of Canada.