Bank of Canada: Policy on hold as tariffs bite – Rabobank
Rabobank strategists expect the Bank of Canada (BoC) to keep its overnight rate at 2.25% at the September 2 meeting and through 2027, despite markets pricing in around 17bp of tightening by year-end.
The Bank of Canada (BoC) has signaled that it plans to maintain its overnight rate at 2.25% at the upcoming meeting on September 2 and throughout 2027, according to Rabobank strategists. Despite markets expecting around 17 basis points (bp) of tightening by the end of the year, the strategists argue that monetary policy is already at its terminal rate.
This stance is based on strong Q2 Gross Domestic Product (GDP) growth fueled by exports, escalating US-Canada trade tensions, high headline Consumer Price Index (CPI) inflation due to energy and trade-related risks, and the conclusion that the BoC cannot further tighten policy without causing damage. If current tariffs remain unchanged, the strategists predict that Canadian GDP could be negatively impacted by 0.3-0.4 percentage points points through the end of next year.
The BoC has emphasized its commitment to preventing inflation from spreading to other areas of the economy and creating persistent price pressures, despite underlying economic trends being dampened by a productivity crisis. The strategists believe that the Bank of Canada is at its terminal rate of 2.25% and do not anticipate any rate hikes or cuts through the year-end.
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