Twelve economists project Bank of Canada will hold rate at 2.25% on Wednesday

Q2 GDP grew 3.3% annualized; Statistics Canada early estimate showed July stall

Economists surveyed by The Wall Street Journal diverge on when the Bank of Canada will next move even as all twelve expect the overnight rate to stay at 2.25% on Wednesday. Derek Holt of Bank of Nova Scotia was the only forecaster to project a rate increase by the end of 2026, arguing that slack in the economy would be absorbed at a faster-than-expected pace. Seven economists predicted rate increases during the first half of 2027, and two analysts tabbed the second half of that year. Two expect the bank to remain on hold until 2028. Several of these forecasts are contingent on no further escalation in the U.S.-Canada trade conflict.

The tariff dispute also complicates the central bank’s main focus: ensuring inflation hits and remains at 2%. Canadian retaliatory tariffs of between 15% and 50% on $20 billion of U.S. imports could add between 0.2 and 0.5 percentage points to headline inflation, the economists said. Energy prices remain elevated, and crude oil prices jumped this week after the U.S. resumed attacks on Iran. Headline inflation sits at the top end of the central bank’s 1% to 3% target range, though core prices, which strip out food and energy, are near 2%.

Royce Mendes, head of macro strategy at Desjardins Group, said the bank must keep price pressures in check even when they conflict with growth. “The Bank of Canada must prioritize managing price pressures over growth concerns when the two are in conflict,” Mendes said. “To support growth, policymakers are expected to remain on the sidelines.”

New Trump administration tariffs, the collapse of trade talks between Ottawa and Washington, Canada’s planned retaliatory response and the threat of U.S. duties on Canadian motor vehicles and parts starting Jan. 1 have prompted concern among the Canadian public and business owners. The economists said significant hits in consumer and business confidence in the weeks ahead could be in the offing. Holt said emotions are running high on both sides of the border. “Emotions make for lousy forecasts,” Holt said.

The fraying of ties between the two countries adds another headwind for Canada, which had recently appeared to turn a corner after a period of trade-uncertainty-induced stagnation. Canada’s economy recorded its biggest increase in output in over three years in the second quarter, with 3.3% annualized growth. Expansion was broad-based, powered by exports, household spending and a recovery in business investment. On a one-year basis, real gross domestic product rose 1.2% in the second quarter, relative to flat 12-month growth in the prior three-month period.

For some economists, the case for rate increases had been building on growth that surpassed Bank of Canada expectations and on worries that higher energy prices might spread to other goods. That case has now been set back, according to Sébastien Mc Mahon, chief economist at iA Financial Group. “The trade war escalation has derailed it,” Mc Mahon said.

Minutes from the central bank’s July rate-policy decision indicated senior officials harbored doubts about whether the second-quarter momentum had staying power. Statistics Canada’s early estimate for GDP in July indicated the economy stalled, setting the stage for slower growth in the third quarter.

Avery Shenfeld, chief economist at CIBC Capital Markets, said the trade conflict was only one factor weighing against a near-term hike. “Had we not seen trade-conflict escalation, there still would have been a long runway before the latest pickup in growth would have compelled a rate hike,” Shenfeld said, citing excess capacity in the economy.