The escalation of the trade war disrupts the pace of economic recovery as the Bank of Canada remains on hold for the seventh consecutive time.

On Wednesday, the Bank of Canada held its benchmark interest rate steady for the seventh consecutive time, keeping the policy rate at 2.25%, in line with market expectations. As the U.S.-Canada trade war escalates, the Bank of Canada is facing a more complex policy environment: the new round of tariffs from the U.S. may dampen Canadian exports, employment, and investment, while the impending retaliatory tariffs from Canada could push domestic prices higher. With economic growth facing downward risks and inflationary pressures potentially rising, the Bank of Canada opted to continue monitoring the situation. Since October of last year, Bank of Canada Governor Tiff Macklem and his policy team have maintained the interest rate. Recent developments in the Middle East have pushed global energy prices higher, coupled with the deteriorating trade relations between the U.S. and Canada, adding further uncertainty to Canada's economic and inflation outlook. As widely expected, the Bank of Canada's Governing Council decided on Wednesday to keep the policy rate at 2.25%, marking the seventh consecutive meeting without change. Since October of last year, the Bank of Canada has kept the policy rate steady while seeking to balance economic growth, inflation, and trade dynamics. In the past month, that balance has become increasingly difficult. Following the collapse of U.S.-Canada trade negotiations, the U.S. has again imposed tariffs on Canadian goods, leading the Canadian government to announce corresponding countermeasures, making the actual impacts of trade policy on the Canadian economy and prices even harder to gauge. Against this backdrop, the Bank of Canada did not rush to adjust interest rates but chose to wait for more economic data to assess how the new round of trade conflicts could affect future inflation trends. The U.S. has imposed tariffs on approximately CAD 2.8 billion worth of Canadian goods, putting pressure on exports and investment. The escalation of the U.S.-Canada trade war has become a major risk to the Canadian economy. The latest round of U.S. tariffs covers about CAD 2.8 billion of Canadian goods, expected to weaken the competitiveness of Canadian businesses in the U.S. market and directly pressure exports. If the tariffs result in a decrease in U.S. demand for Canadian goods, affected businesses may cut production and capital expenditures, and slow down hiring, further dragging down Canadian employment and investment. This shock may ultimately lower domestic demand in Canada through a slowdown in economic activity, putting downward pressure on inflation. However, at the same time, the Canadian government's countermeasures are affecting prices in another direction. Canada previously announced that it would impose "equivalent" retaliatory tariffs on U.S. imports, with the new measures scheduled to take effect on September 8. As import tariffs rise, prices for some U.S. goods and imported production materials used by Canadian businesses may increase, further affecting companies and consumers. Thus, the impact of the new trade war on Canadian inflation operates in multiple directions: U.S. tariffs may suppress demand by hurting economic activity, while Canada's own countermeasures could directly raise domestic prices. Before the escalation of trade conflicts, the Canadian economy had actually shown signs of improvement. Data showed that Canada's gross domestic product (GDP) grew at an annualized rate of 3.3% in the second quarter. This performance reflects a significant rebound in economic momentum after nearly a year of stagnation. Meanwhile, Canada's unemployment rate has been trending downward this summer, and there are signs of improvement in the labor market. However, the new round of U.S. tariffs poses new challenges to this recovery momentum. Exports are a crucial component of the Canadian economy, and the U.S. is Canada's largest trading partner. If tariffs continue to weaken exports to the U.S. and further impact business hiring and capital investment, there remains considerable uncertainty over whether the strong growth seen in the second quarter can be sustained. This is also one of the important contexts behind why the Bank of Canada is currently not eager to adjust its policy. Before the real impacts of the trade conflict are fully reflected in economic data, decision-makers need to assess just how long recent economic improvements can last. Inflation rose to 3% in July, reaching the upper limit of the Bank's target range. In addition to the outlook for economic growth, the Bank of Canada must also contend with persistently high overall inflation. In July, Canada's consumer price index (CPI) rose by 3% year-on-year, hitting the upper limit of the Bank's inflation control range of 1% to 3%, and exceeding the 2% policy target. However, recent increases in overall inflation have been largely influenced by energy prices. Developments in the Middle East have pushed global oil prices higher, becoming an important reason for the recent uptick in Canada's CPI, while the core inflation indicator, which reflects internal price pressures, remains roughly close to the Bank of Canada's target of 2%. This provides the central bank with some temporary leeway to continue observing the situation. However, the new round of tariffs on U.S. imports is set to take effect on September 8. If higher import costs begin to broadly prices for goods and services, the Bank may need to reassess the timeline for inflation to return to its 2% target. The direction of the trade war may become a key factor in the Bank of Canada's next policy steps. For the Bank of Canada, the biggest variable may come from the development of the U.S.-Canada trade conflict. If U.S. tariffs significantly impact Canadian exports, business investment, and employment, leading to a renewed slowdown in economic growth, the necessity for future interest rate cuts may rise. However, if Canada's retaliatory tariffs, combined with rising energy prices, lead to persistently high consumer prices, the central bank's room to loosen monetary policy will be limited. The decision to keep the policy rate at 2.25% for the seventh consecutive time further reflects the Bank of Canada's choice to remain on the sidelines amidst a highly uncertain trade environment, rather than making a clear shift to a more accommodative or more restrictive policy stance. Macklem and Carolyn Rogers, the Bank of Canada's Senior Deputy Governor, will hold a press conference at 10:30 PM Beijing time to further explain this interest rate decision. The market will closely watch how the central bank evaluates the impact of the new round of U.S.-Canada tariffs on economic growth and inflation, and whether the escalation of the trade war has changed the future path of interest rates.