Bank of Canada holds key rate at 2.75% in the face of trade uncertainty

Though headline inflation rose two ticks to 1.9% in June, the Bank of Canada sees underlying inflation levels around 2.5% when stripping out volatility and tax changes that are skewing the data.

Canada’s labour market is showing some weakness in tariff-exposed sectors such as manufacturing, but other industries continue to broadly add jobs.

Macklem said the Bank of Canada will be watching how much tariffs affect business activity and demand for Canadian exports, and whether higher costs from those import duties are passed on to customers.

Odds of severe global trade war have decreased, says Macklem

U.S. effective tariff rates are “less than were threatened,” Macklem noted, but are still higher than recent historical experience. The odds of a “severe and escalating” global trade war have diminished in recent months, he said.

While U.S. President Donald Trump has recently struck trade deals with the likes of Japan and the European Union, those agreements still come with some level of tariffs. Macklem said the nature of those deals suggest “the United States is not returning to open trade.”

The Bank of Canada published a monetary policy report alongside its rate decision Wednesday, but that report once again did not include a single, central forecast for the economy as the central bank’s outlook remains clouded by uncertainty. Instead, the bank offered a scenario based on the current tariff level persisting, and two others that outline both a de-escalation and a further ramp up of tariffs. Each of those case studies sees at least some level of tariffs persisting.

While it’s tricky to get a firm number on what tariff levels look like given a variety of exemptions and overlapping duties, the central bank sees the effective U.S. tariff rate on Canada at roughly seven or 8% today, up five percentage points from the start of the year.

The bank’s monetary policymakers also assume a vast majority of Canadian goods will be exempt from tariffs over the coming years thanks to their compliance with the Canada-U.S.-Mexico Agreement (CUSMA) as companies rush to get certified.