Canada’s central bank on Wednesday left its benchmark interest rate unchanged at 2.25 per cent for the seventh straight time, but warned of possible consequences from the trade war with the United States.
New tariffs imposed by U.S. President Donald Trump make the growth outlook more uncertain while the risks of accelerating inflation have increased, the Bank of Canada said.
The interest rate decision was expected by analysts and comes after an economic rebound in the April-June period, when gross domestic product expanded 3.3 per cent on an annual basis, after two lackluster quarters.
“Uncertainty is high and new U.S. tariffs and threats of further action pose risks to the sustainability of the recovery,” the Bank of Canada said in a statement.
Trump has instituted new tariffs on Canada of up to 50 per cent, which went into effect after Prime Minister Mark Carney broke off trade talks on August 21. Canada has in turn retaliated with tariffs on American products, set to take effect on September 8.
Both of these measures will raise costs for some businesses and could lead to higher consumer prices over time, the central bank statement warned.
Bank of Canada Governor Tiff Macklem said businesses have been “adapting” to the new trade relationship.
“They are diversifying their exports,” he told reporters Wednesday.
However, he noted that inflation, which accelerated in July to three per cent on the back of rising fuel costs, “is running too high.”
TD Bank said in a note that it expects the rate to “remain unchanged through next year,” but the central bank “preserves the flexibility should conditions deteriorate or inflation prove more persistent than anticipated.”
