Bank of Canada likely to keep key rate unchanged amid trade uncertainty

The Bank of Canada is likely to leave its benchmark interest rate at 2.75% this week, despite expectations from some economists that a rate cut is possible. CIBC Chief Economist Avery Schoenfeld calls a rate cut unlikely, but a “pleasant surprise” if it happens.

Financial markets are currently pricing the chances of a 0.25% rate cut at just 7%, driven by higher inflation and unexpectedly strong labor market data: the economy added 83,000 jobs in June and the unemployment rate fell for the first time since January.

Inflation rose to 1.9% in June, while the Bank of Canada’s core rate remains around 3%, making it difficult to argue for further easing.

Still, Schoenfeld and his colleagues at CIBC expect two rate cuts before the end of the year. They point to a slowing economy and growing “idleness” in manufacturing that will soon ease inflationary pressures. He also believes that the trade dispute with the US has already led to a decline in GDP in the second quarter.

The latest Bank of Canada business sentiment survey showed that companies are choosing not to pass on the cost of higher tariffs to consumers, a signal that the surge in inflation may be temporary.

BoC Governor Tiff Macklem previously noted that due to the instability in trade, the bank did not publish a full economic forecast in April, but presented two scenarios.

Desjardins chief economist Jimmy Jean believes that the bank has enough clarity to return to standard forecasting. However, he also allows for the possibility of a rate cut in September, especially if the US imposes the promised 35% tariffs on Canadian exports.

Of particular concern are tariffs on steel, aluminum and copper, which are especially important for the economies of Ontario and Quebec. In this case, Jean said, a further rate cut would be justified.

While the federal government has stepped up investment in defense and infrastructure, Desjardins expects the impact of these measures to be seen only in the long term. That leaves the Bank of Canada with room to act in the coming months.