Bank of Canada holds benchmark rate steady amid escalating trade war with U.S.

The Bank of Canada held its benchmark interest rate steady for the seventh consecutive time as the escalating trade war with the United States risks slowing economic growth while pushing up consumer prices.

As widely expected, the central bank’s governing council kept the policy rate at 2.25 per cent.

Governor Tiff Macklem and his team have kept monetary policy in cruise control since last October, as the bank navigated a tricky combination of rising global energy prices – the result of the war in the Middle East – and weak domestic growth tied in large part to the trade war with the United States.

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The breakdown in trade negotiations with Washington last month, another wave of American tariffs, and Ottawa’s threat to retaliate has only added to the uncertainty about the trajectory of the Canadian economy.

New U.S. tariffs on around $28-billion worth of Canadian goods will weigh on exports, jobs and investment in Canada – all of which should put downward pressure on inflation over time. At the same time, Canada’s “dollar-for-dollar” retaliatory tariffs on American imports – scheduled to come into force on Sept. 8 – will push up prices in Canada.

That creates a dilemma for the central bank, which can cut interest rates to support economic growth, or raise interest rates to head off inflation. On Wednesday, the bank decided to play for more time.

Before the latest escalation in the trade war, things were looking up for the Canadian economy. Gross domestic product grew at an impressive 3.3-per-cent annualized rate in the second quarter after flatlining for much of the past year. Unemployment trended lower through the summer.

Annual Consumer Price Index inflation clocked in at 3 per cent in July – the top end of the central bank’s 1-per-cent to 3-per-cent control band. However, the rise in inflation in recent months was largely the result of the oil price shock, and measures of underlying inflation in the economy remain close to the bank’s 2-per-cent target.

Mr. Macklem and senior deputy governor Carolyn Rogers will hold a press conference at 10:30 a.m. ET explaining the latest stand-pat decision.