Bank of Canada: Policy on hold as tariffs bite – Rabobank

Rabobank strategists expect the Bank of Canada (BoC) to keep its overnight rate at 2.25% at the September 2 meeting and through 2027, despite markets pricing in around 17bp of tightening by year-end. They highlight strong Q2 Gross Domestic Product (GDP) growth supported by exports, escalating US–Canada trade tensions, elevated headline Consumer Price Index (CPI) inflation amid energy and trade-related risks, and argues that monetary policy is already at its terminal rate.

Rates steady despite inflation risks

"We expect the Bank of Canada to hold the overnight rate at 2.25% on September 2, with no hikes or cuts forecast through 2027. Meanwhile, market pricing implies investors are positioned for 17bp worth of hikes by year end."

"Indeed, we believe that if tariffs stay roughly where they currently are, this could drag on Canadian GDP by 0.3-0.4ppt through the end of next year."

"While the Bank has emphasized its commitment to preventing inflation from metastasizing to the rest of the economy and creating prolonged price pressures, underlying economic trends are still subdued by the ongoing productivity crisis. We believe that, once again, the Bank has its hands tied."

"As geopolitical troubles remain front and centre, with new and higher tariffs from the US and Canada being enforced against each other and the Strait of Hormuz still closed to traffic, we are maintaining our stance that the Bank of Canada is at its terminal rate of 2.25% and do not forecast hikes or cuts through year end."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)