The Bank of Canada’s overnight rate has held steady at 2.25% since October 2025, with the vast majority of market watchers predicting from the beginning of 2026 the bank would not make a change any time this year.
However, the breakdown in tariff negotiations between Canada and the US has some economists now questioning previous predictions of the bank’s next rate announcement on Sept. 2
The US has slapped 50% levies, known as the Section 338 levies, on approximately 5% of Canadian exports, on top of existing tariffs on steel, aluminum, lumber, and motor vehicles, moving Canada's average effective tariff rate to approximately 6% from around 3% and arriving against a housing market already subdued by 18 months of uncertainty, as it moves into the fall buying season.
According to RBC Economics, plastic products, electrical machinery, furniture, and wood products will be the hardest hit sectors in the round of tariffs announced on the weekend, with US President Trump on Monday announcing he plans to raise tariffs on Canadian autos and auto parts to 50% on Jan. 1
RBC says the economic impacts will be felt more in Quebec, BC and Ontario.
Canada accounts for approximately 3.7% of total US imports of the targeted products, while the US absorbs 81% of Canada's exports in those same categories, leaving Canadian exporters with substantially fewer alternative markets than their American counterparts, according to Canadian Mortgage Professional (CMP).
RBC Economics didn’t hold back on the reality facing affected exporters, saying "purchases of these products from Canada would be prohibitively expensive" under the new 50% rate, given that tariffs of that magnitude apply exclusively to Canada.
Meanwhile, the bank was more moderate at the macro level, noting that "the size of the tariffs is likely not large enough to derail Canada's economic growth backdrop," says CMP.
The Canadian value-added content of the newly tariffed goods amounts to approximately 0.4% of gross domestic product (GDP), the bank’s analysis estimated.
Even with the new tariffs, more than 80% of Canadian exports continue to move duty-free under the Canada–United States–Mexico Agreement (CUSMA). In addition, Canada is a net importer from the US in the Section 338 product list, bringing in roughly US$23 billion of those goods in 2025 versus approximately US$20 billion in exports, said RBC Economics.
The RBC review did not include a prediction of the bank cutting its rate in response to the new tariffs as the US tariffs “remain narrowly concentrated in a limited number of sectors, and targeted fiscal support, not blanket monetary easing, is better suited to cushion affected industries.” said RBC.
"We do not expect the broader macroeconomic impact of these new tariffs to be enough to push the Bank of Canada to seriously consider pivoting to interest rate cuts."
Government assistance is widely expected to accompany the latest round of measures.
Where the calculus has shifted is on the rate-hike side, said RBC.
“Intensifying trade uncertainty, combined with a recent moderation in underlying inflation, stripping out energy products, has raised the probability that the BoC will not raise rates in 2026.”
According to CMP, “Brokers tracking Canada’s tariff-clouded Bank of Canada rate outlook for the remainder of the year should plan for a prolonged hold.”
Another factor that could affect a bank decision is Prime Minister Mark Carney’s announcement there will be retaliatory tariffs levied on the US on Sept. 8, after the bank’s announcement date.
“For brokers advising clients on rate timing, the margin between a hold and a cut is narrowing with every tariff escalation.” said RBC.