Survey: Bank of Canada Expected to Hold Rates Steady for at Least a Year as Trade Uncertainties Limit Room for Interest Rate Hikes

1. The latest survey shows that all surveyed economists expect the Bank of Canada to keep the overnight rate unchanged at 2.25% at its policy meeting on September 2 and to maintain this level for at least the next year. Policymakers have kept the rate steady since last October in order to observe the impact of the US-Iran war on inflation and economic activity, while also assessing the increasing trade tensions with its main export markets.2. Although Canada’s July inflation rate is at the upper end of the central bank’s 1%-3% target range, stable core inflation suggests that demand remains weak. Combined with expectations for an upcoming economic recovery, the central bank still has room to wait and see before raising interest rates. The survey shows that respondents expect Canada's overnight rate to remain at 2.25% for the rest of this year and until the third quarter of next year, and expect an increase to 2.50% in the fourth quarter of next year, consistent with the July survey results.3. This survey was conducted after Canadian Prime Minister Carney withdrew from the latest round of US-Canada tariff negotiations and announced retaliatory tariffs on August 22. Economists at Canadian Imperial Bank of Commerce said, "In the short term, concerns about future inflation are roughly balanced by the risks to economic growth posed by trade tensions, allowing the Bank of Canada to maintain a wait-and-see stance."4. Some economists worry that the recent weakening of the Canadian dollar may bring additional inflationary pressure. BMO senior economist noted, "Due to the failed trade negotiations, the Canadian dollar has weakened, which will have a greater impact on inflation." However, most economists believe that the main impact of the trade war escalation will be reflected in dragging down GDP growth, while federal government support measures will partially offset the shock.5. The Canadian economy grew at an annualized rate of 3.3% last quarter, strongly rebounding from a technical recession thanks to robust exports and solid domestic demand. Among economists making predictions, nearly half expect the Bank of Canada will raise rates at least once before the end of the second quarter of 2027. TD Securities macro strategists said the new tariff measures have partially offset the recent strong economic data, but the scope of impact is relatively limited, which may still allow the central bank to raise rates next year.