The Bank of Canada could be between a rock and a hard place when it comes to its rate announcement on Sept. 2
Most market watchers have predicted the bank would hold its rate steady at 2.25% until at least the end of 2026, but the Canada/US trade war may have taken a rate hold off the table.
Canada announced retaliatory tariffs on the US on Tuesday, as well as a $7.5 billion financial stimulus package to protect Canadian companies and workers from the effects of the US tariffs.
Canada’s tariffs will increase the costs of 700 products imported from the US, with the likelihood of increasing inflation in Canada to a level above the bank’s comfort ceiling of 3%, which would normally trigger a rate hike.
But these are not normal times.
The stimulus package is designed to combat a worst-case scenario of rapidly rising costs, as well as potential job losses because of US tariffs leveled on Canadian businesses last week.
Melanie Joly, Canada’s minister of industry, said the $7.5 billion stimulus package will offer support for small businesses, including financing distributed through regional development agencies.
Small and medium-sized businesses will have access to interest-free loans from $250,000 up to $5 million, with no repayment due for 36 months.
Minister of Jobs and Families, Patty Hajdu, added the federal government will extend employment insurance (EI) measures already in place, that includes waiving the one-week waiting period to receive benefits, plus those making an EI claim will be able to receive benefits without exhausting their vacation and severance pay.
Additionally, workers with tenure will be able to collect EI benefits for an additional 20 weeks, to allow more time to find new employment and companies will be able to reduce workers’ schedules to as few as two days a week and employees with shortened hours will have access to EI benefits to replace a portion of their lost earnings on days not worked.
The bank will need to take all aspects of Canada’s response to the US tariffs into consider of the rate decision. The rock is Sept. 2, when the bank will make its announcement and the hard place is Sept. 8, when the stimulus and Canada’s tariffs on the US come into play.
The stimulus package will weigh on the bank’s decision, but how the package will affect the economy will not be known until after the bank’s decision is made.
"If the trade war persists and/or worsens, the bank's job becomes much harder," said National Bank of Canada strategists Taylor Schleich and Ethan Currie in a note Monday, before Canada’s response to US tariffs were announced. "If the trade war persists, the Bank of Canada's next move is likely to be a cut with the timing dependent on the evolution of economic and inflation data."
What is also off the table is a rate hike; the bank could lower the rate by .25% as a hedge against the stimulus package not performing as hoped or hold the rate at 2.25% until its next announcement on Dec. 9, when the full effects of the stimulus package will be known.
