The Bank of Canada left interest rates unchanged on Wednesday, as expected, against the backdrop of renewed Canada-US tensions and uncertainty over whether relations between the two countries will improve in the weeks ahead.
The BoC held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%. This was the seventh consecutive meeting without a change in rates.
With the Middle East conflict ongoing and the Strait of Hormuz largely closed, inflation risks have risen, as high oil prices, elevated refinery margins and the new US and Canadian tariffs could broaden price pressures, according to the BoC in its policy decision statement.
"The upside risks to inflation have increased, while new tariffs make growth prospects more uncertain," said Governor Tiff Macklem in the press conference opening statement. "Governing Council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed."
US-Canada trade negotiations broke down on Aug. 21, with relations hitting a low point. The US imposed 50% tariffs on about $20 billion in Canadian goods, prompting Canada to announce similar-amount retaliatory tariffs that are scheduled to take effect on Tuesday.
The latest round of US tariffs has further clouded the economic outlook amid investment uncertainty and hiring plans, while Canada's retaliatory measures risk adding to consumer price pressures.
The BoC's key challenge appears to be balancing rising inflation risks against weakening growth, with uncertainty over how it would respond if both pressures materialize simultaneously.
Macklem will hold a press conference on the policy decision at 10:30 a.m. ET Wednesday.