Bank of Canada holds benchmark rate steady amid escalating trade war with U.S.

“The Bank of Canada held its benchmark interest rate steady for the seventh consecutive time and warned that inflation risks are rising while the escalating trade war with the United States could knock Canada’s economic recovery off course.

As widely expected, the central bank’s governing council kept the policy rate at 2.25 per cent.

Governor Tiff Macklem said that the central bank is navigating two key risks.

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“Economic growth in Canada has picked up after stalling over the past year. That puts us on a stronger footing as we face new challenges. But uncertainty about the sustainability of the rebound has increased with new U.S. trade actions,” Mr. Macklem said in a press conference after the rate announcement.”

“Second, the ongoing conflict in the Middle East is keeping energy prices higher for longer, and this has increased the upside risks to the outlook for inflation,” he said.

“The breakdown in trade negotiations with Washington last month, another wave of American tariffs, and Ottawa’s threat to retaliate has added to the uncertainty about the trajectory of the Canadian economy and inflation.

New U.S. tariffs on around $28-billion worth of Canadian goods will weigh on exports, jobs and investment in Canada – all of which should put downward pressure on inflation over time. At the same time, Canada’s “dollar-for-dollar” retaliatory tariffs on American imports – scheduled to come into force on Sept. 8 – will push up prices in Canada.

Mr. Macklem noted that the new U.S. tariffs only hit around 5 per cent of Canadian exports, and that government support programs may mitigate some of the damage.

But that targetted sectors will be hit hard he said, and “the situation remains fluid.”

“The added uncertainty about the future of Canada-US trade relations may lead businesses more broadly to delay investment and hiring decisions,” he said.

Before the latest escalation in the trade war, things were looking up for the Canadian economy. Gross domestic product grew at an impressive 3.3 per cent annualized rate in the second quarter after flatlining for much of the past year. Unemployment trended ”

“Annual Consumer Price Index inflation clocked in at 3 per cent in July – the top end of the central bank’s 1-per-cent to 3-per-cent control band. However, the rise in inflation in recent months was largely the result of the oil price shock, and measures of underlying inflation in the economy remain close to the bank’s 2-per-cent target.

“So far, rising oil prices have not morphed into broad-based inflation in Canada. But the bank remains concerned about this happening, particularly as the conflict in the Middle East continues.

“With the conflict ongoing and shipments through the Strait of Hormuz still curtailed, upside risks to our inflation forecast have increased,” Mr. Macklem said. “The longer oil prices and refinery margins stay high, the greater the risk that higher energy prices spill over and turn into persistent inflation. In addition, the new US tariffs and the Canadian counter-tariffs could add costs for some businesses and feed into consumer prices over time.”

He said that he and his colleagues are prepared to adjust interest rates as needed. ”

source / The Globe & Mail .