The escalation of the trade war disrupts the pace of economic recovery, and the Bank of Canada stands still for the seventh time in a row

The Zhitong Finance App learned that the Bank of Canada kept the benchmark interest rate unchanged for the seventh time in a row on Wednesday, keeping the policy interest rate at 2.25%, in line with general market expectations. As the trade war between the US and Canada escalates further, the Bank of Canada is facing a more complex policy environment: a new round of US tariffs may damage Canadian exports, employment, and investment, while Canada's upcoming retaliatory tariffs may push up domestic prices. As economic growth faces downside risks and inflationary pressure is likely to rise, the Bank of Canada chose to continue to wait and see.

Bank of Canada Governor Tiff McClum and his policy team have kept interest rates unchanged since October last year. The recent situation in the Middle East has pushed up global energy prices, and the US-Canada trade relationship has further worsened the uncertainty of the Canadian economy and inflation prospects.

For the seventh time in a row, the no-action policy interest rate remained at 2.25%

As the market generally expected, the Bank of Canada Management Committee decided on Wednesday to keep the policy interest rate at 2.25%. This is the 7th consecutive meeting that has stood still. Since October of last year, the Bank of Canada has kept its policy interest rate unchanged, seeking a balance between economic growth, inflation, and trade conditions.

This balance has become more difficult in the last month. After the US-Canada trade negotiations broke down, the US once again imposed tariffs on Canadian goods, and the Canadian government later announced that it would take corresponding countermeasures, making it more difficult to judge the actual impact of trade policies on the Canadian economy and prices.

In this context, the Bank of Canada is not in a hurry to adjust interest rates, but instead chose to wait for more economic data to observe how the new round of trade conflicts will affect future growth and inflation trends.

The US imposes additional tariffs on about 28 billion Canadian dollars of Canadian goods, and exports and investment are under pressure

The escalation of the US-Canada trade war has become one of the major risks facing the Canadian economy. The latest round of US tariffs covers about 28 billion Canadian dollars of Canadian goods, which is expected to weaken the competitiveness of Canadian companies in the US market and put direct pressure on exports.

If tariffs cause US demand for Canadian goods to decline, affected companies may cut production and capital expenditure and slow recruitment, further dragging down Canadian employment and investment.

This impact may eventually reduce domestic demand in Canada through a slowdown in economic activity and put some downward pressure on inflation. At the same time, however, the Canadian government's countermeasures are having an impact in the other direction.

Canada previously announced that it will implement “equal” retaliatory tariffs on goods imported from the US, and the new measures are scheduled to officially take effect on September 8.

As import tariffs increase, the prices of some US goods and imported means of production used by Canadian companies may rise and be further transmitted to enterprises and consumers.

Therefore, the impact of the new trade war on Canadian inflation is not unidirectional: US tariffs may depress demand by cracking down on economic activity, while Canada's own countermeasures may directly push up domestic prices.

The Canadian economy just now rebounded and GDP grew by 3.3% in the second quarter

Before the trade conflict escalated, the Canadian economy had actually just shown significant improvements.

According to the data, Canada's gross domestic product (GDP) grew at an annual rate of 3.3% in the second quarter. With economic growth close to stagnation for most of the previous year, this performance showed a clear recovery in momentum in the Canadian economy. Meanwhile, Canada's unemployment rate showed a downward trend this summer, and the labor market showed signs of improvement.

However, the new round of US tariffs has put this recovery momentum to a new test.

Exports are an important part of the Canadian economy, and the US is Canada's largest trading partner. If tariffs continue to weaken exports to the US and further affect corporate recruitment and capital investment, there is still great uncertainty about whether the strong growth seen in the second quarter will continue.

This is one of the important reasons why the Bank of Canada is currently not in a hurry to adjust its policy. Until the actual impact of trade conflicts is fully reflected in economic data, policymakers still need to determine how long recent economic improvements will last.

Inflation rose to 3% in July and hit the upper limit of the central bank's target range

In addition to economic growth prospects, the Bank of Canada also needs to face overall inflation, which is still high. Canada's consumer price index (CPI) rose 3% year on year in July. It has reached the upper limit of the central bank's 1% to 3% inflation control range, and is above the 2% policy target.

However, the recent rise in overall inflation has been largely affected by energy prices. The situation in the Middle East has driven up global oil prices and has become an important reason for Canada's recent rise in CPI, and the underlying inflation index, which reflects internal price pressure in the economy, is still roughly close to the Bank of Canada's 2% target. This leaves room for the central bank to continue watching for the time being.

However, Canada's new round of tariffs on imported goods from the US will come into effect on September 8. If higher import costs begin to spread widely to the prices of goods and services, the central bank may need to reassess how quickly Canada's inflation returns to the 2% target.

The direction of the trade war may become the key to the Bank of Canada's next policy

For the Bank of Canada, the next biggest variable may come from the development of the US-Canada trade conflict. If US tariffs clearly hit Canadian exports, corporate investment, and employment, causing economic growth to slow down again, the need to cut interest rates in the future may increase. However, if Canada's retaliatory tariffs are compounded by rising energy prices, causing consumer prices to continue to rise, then the central bank's room to relax monetary policy will be limited.

Maintaining a policy interest rate of 2.25% for the 7th time in a row this time further shows that the Bank of Canada chose to wait and see for a while in a highly uncertain trade environment rather than clearly shifting to a more relaxed or more austerity policy position.

McClum and Bank of Canada Senior Vice Governor Carolyn Rogers will hold a press conference at 10:30 p.m. Beijing time to further explain the interest rate decision. The market will focus on how the central bank assesses the impact of the new round of US-Canada tariff conflict on economic growth and inflation, and whether the escalation of the trade war has changed the future interest rate path.