Bank of Canada Leaves Rate Unchanged at 2.25% Amid Tariff Uncertainty and Geopolitical Tensions

The Bank of Canada opted to keep its benchmark interest rate on hold once again on Wednesday, citing growing uncertainty from fresh U.S. trade measures and the prolonged conflict in the Middle East.

The policy rate was maintained at 2.25% for the seventh consecutive meeting, a decision that was broadly anticipated by market watchers.

In a prepared statement, Governor Tiff Macklem noted that ongoing hostilities in the region continue to put upward pressure on global energy prices, adding to inflation concerns. At the same time, the renewed deterioration in trade relations with the United States poses a threat to Canada’s fragile economic recovery. Macklem warned that this heightened uncertainty could prompt businesses to postpone capital expenditures and hiring until the trade environment becomes clearer.

“Monetary policy cannot offset the effects of tariffs or influence global energy prices. What we can do is ensure global developments don’t jeopardize price stability in Canada,” Macklem said.

The central bank relies on its policy rate to manage inflation while fostering growth when price pressures are subdued.

In July, the annual inflation rate climbed to 3.0%, driven largely by volatile gasoline prices following the escalation of the Iran conflict earlier this year. On the growth front, the economy expanded at an annualized rate of 3.3% in the second quarter, though analysts remain skeptical that momentum carried into the third quarter.

The United States imposed 50% duties on a targeted list of Canadian exports on August 22. Macklem suggested the overall macroeconomic impact would likely be limited, though he acknowledged that certain sectors could face severe disruption. Canada is set to implement retaliatory tariffs on U.S. goods effective September 8, which could raise input costs for domestic manufacturers. If those costs are passed on to end consumers, Macklem cautioned, inflation could receive an additional jolt.

Ahead of the latest trade escalation, export figures had been improving, and businesses were increasingly showing signs of adaptation to existing restrictions, Macklem added.

“Overall, the data reaffirm our view of a broadening recovery,” he said.

Given that economic conditions remain broadly aligned with the Bank’s projections, the governing council judged that no adjustment to the policy rate was warranted at this time.

KPMG Chief Economist Ali Jaffery said in a note that he expects the bank to be less worried about inflation given the sharp risks for lower growth in the face of escalating tariffs. His call remains for the Bank of Canada to stay on hold through the end of 2027.

CIBC Chief Economist Avery Shenfeld said it was no surprise the central bank left its key rate unchanged “amidst the fog of a trade war.”

Shenfeld said CIBC sees “little prospect” for any change in the policy rate this year, given that both the U.S. tariff and Iran war fronts could shift in the months ahead.