Confronted with a hazard on each side of the strait, a trade war on one flank and energy-driven inflation on the other, the Bank held at 2.25% and steered visibly closer to the one it fears less. It appears the Bank is prepared to tolerate a manageable trade drag rather than let energy inflation spiral.
The details.
- The Bank noted the broad-based rebound in Q2 GDP (3.3%) and the drop in unemployment to 6.4% in July, but also noted that excess supply lingers.
- Headline CPI near 3% was described as ‘too high’, with upside risks from spillover from higher oil prices (ex-gas 2.2%, core near 2%).
- The collapsed US-Canada trade talks affect roughly 5% of Canadian exports, with the bigger risk being delayed hiring and investment than the tariffs themselves.
- The press release quietly dropped the line from last meeting’s statement that the policy rate was at the ‘appropriate’ level.
The implications.
- The market has read this as a hawkish hold, with the Bank more concerned with the inflation monster than the growth whirlpool.
- The implied odds of a 2026 hike have shifted from 62% to 82%, with the market expecting 3? hikes by July 2027, up from under 3 yesterday.
- CAD 2y yields are up 7-8 bps post-announcement.
