Trade talks between Canada and the US have stalled and the US has slapped 35% tariffs on Canadian goods, up from 25%. That is bad news for the Canadian economy, which sends 75% of its exports south of the border. However, the damage from high tariffs is mitigated by an exception for automobiles, auto parts and other products which are comply with the US-Mexico-Canada agreement.
The Bank of Canada is back in a wait-and-see-stance after cutting interest rates in March to 2.75%. The BoC has held rates for three consecutive meetings, as US tariffs have created a lot of uncertainty with regard to growth and inflation.
Will BoC cut in September?
If today’s job report is as weak as expected or even softer, it will support the case for another rate cut, as the BoC doesn’t want to see the labor market deteriorate sharply. The inflation picture is mixed- headline CPI is at 1.9%, just below the 2% target, but core CPI is at 3%, higher than than BoC would like to see.
If inflation doesn’t show much change before the next BoC meeting in September, the employment data will likely be the critical factor in determining whether the central bank holds or lower rates.
The BoC has also noted its concern over the uncertainty caused by the tariff war between Canada and the US, If the tariff picture clears up before the September meeting, it would reduce uncertainty and make it easier for the BoC to chart a rate path.
