Bank of Canada: Tariffs reshape rate risks – NBC

National Bank of Canada analysts Taylor Schleich and Ethan Currie project the Bank of Canada will maintain its overnight rate at 2.25% and continue current balance sheet policy. They caution that markets may be pricing in late-2026 rate hikes too aggressively, with risks favoring a Canadian Dollar-supported rally in Government of Canada bonds over U.S. Treasuries.

Escalating U.S. trade policy and retaliatory tariffs shift risks towards a more conservative, data-dependent approach. The Bank of Canada is expected to keep the overnight rate unchanged at 2.25%, a decision already anticipated by forecasters and OIS markets. This would be the seventh consecutive rate hold. Despite trade tensions, the impact on rate expectations has been relatively limited, with near-term hike odds remaining near 65%.

Investors believe a resolution to the conflict is probable since short-term rate hikes clash with a prolonged trade war. Analysts feel optimistic but believe market expectations of near-term hikes do not fully represent the balance of risks. The repricing has been modest, and the markets still place too much emphasis on near-term hikes.

They do not anticipate a rate cut, even though one occurred in March 2025 when the policy rate was higher and the Bank was already in an easing cycle. The Bank may employ limitations and a data-dependent strategy during this meeting. Similar to the March 2025 response, a six-month pause before a cut could be delivered in September if the trade war worsens and the economy stalls.