Bank of Canada holds rates steady for the seventh consecutive day: Tariff war fuels inflation risks; 63% of analysts bet on a rate hike in the first half of 2027.

Bank of Canada holds rates steady for the seventh consecutive day: Tariff war fuels inflation risks; 63% of analysts bet on a rate hike in the first half of 2027.

On September 2, the Bank of Canada kept its overnight interest rate unchanged at 2.25% for the seventh consecutive meeting . However, the escalating trade war between the US and Canada is increasing the risk of inflation, and the market has begun to bet that its next move will be an interest rate hike.

In a statement, the Bank of Canada said that the evolution of the economy and inflation was "broadly in line" with its July forecast, but "upside risks to inflation have increased and new tariffs have made the growth outlook more uncertain."

Governor Tiff Macklem said that the Canadian economy has rebounded after stagnating for the past year, "which puts us on a more solid foundation as we face new challenges," but "uncertainty about the sustainability of the rebound has increased with new U.S. trade actions."

Following the announcement of the decision, Canadian short-term government bonds were sold off, with the yield on two-year bonds rising as high as 3.048%, and the Canadian dollar strengthening to 1.3847 against the US dollar. A Bloomberg survey showed that 63% of analysts expect the central bank to raise interest rates in the first half of 2027, consistent with pricing in the overnight swap market.

The tariff war escalated fully after negotiations broke down on August 21.

Relations between the United States and Canada have deteriorated significantly since August 21, with weeks of negotiations aimed at reducing tariffs and trade barriers breaking down.

As reported by Wall Street News , trade negotiations between the United States and Canada broke down last Friday, August 21. The United States subsequently imposed a 50% tariff on approximately $20 billion worth of Canadian goods on August 22. Canadian Prime Minister Carney then stated that Canada would take retaliatory measures of equal value starting September 8.

According to Xinhua News Agency, the Canadian government announced on Tuesday, September 25th, that it would impose retaliatory tariffs on approximately $20 billion worth of U.S. goods. CCTV News reported that the Canadian government stated that starting September 8th, it would impose retaliatory tariffs on approximately 700 U.S. products, with rates of 15%, 25%, or 50%; simultaneously, it would launch a C$7.5 billion aid package to support businesses and workers affected by the new U.S. tariffs.

Canada's economy rebounded strongly in the second quarter, growing at an annualized rate of 3.3%, after stagnating for nearly a year. The growth was driven by investment, exports, and household consumption, while the job market also tightened.

In his opening remarks at the press conference, Macklem emphasized that the rebound in growth has put the central bank "on a more solid footing," but he also warned that uncertainty about the sustainability of the rebound is increasing with new U.S. trade actions. Further escalation of trade tensions would be a major headwind for sales, hiring, and investment.

Policy dilemma: Cutting interest rates to save the economy and preventing inflation are mutually exclusive.

Tony Stillo of Oxford Economics said the impact of central bank interest rate adjustments will last for the next two years, and policymakers "don't want to cut rates first and then raise them, creating more uncertainty through their own policy actions," so they will be "very cautious."

This assessment pinpoints the essence of the current predicament: central banks cannot help the economy absorb structural trade damage by cutting interest rates without risking increased price pressures.

A Bloomberg survey found that 63% of analysts expect the central bank to raise interest rates in the first half of 2027, consistent with overnight swap market pricing – market pricing has shifted from expectations of easing to preparations for tightening under a stagflation scenario.

After the retaliatory tariffs take effect on September 8, the evolution of inflation data will become a key variable in determining the Bank of Canada's interest rate path.

Risk Warning and DisclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.