Central Banks Navigate Uncertainty Amid Trump's Trade War

Strategic Insights -

In the face of U.S. President Donald Trump's unpredictable trade policy, both the Bank of Canada and the U.S. Federal Reserve are preparing to make interest rate decisions this week, with markets expecting no change in their current rates. The Bank of Canada is set to keep its policy rate at 2.75 per cent for the third consecutive time, while the Fed is expected to maintain the benchmark federal funds rate in the 4.25 per cent to 4.5 per cent range. Central bankers are waiting for clarity on the trade war's impact before making any decisions, as the tariffs have created a chaotic backdrop for monetary policy.

Key Takeaways:

  • The Bank of Canada and the U.S. Federal Reserve are likely to hold interest rates steady this week, with markets pricing in less than 10-per-cent odds of a cut by the Bank of Canada.
  • The tariffs imposed by U.S. President Donald Trump have created uncertainty for central bankers, who are waiting to see how the trade war will affect the economy and inflation.
  • The Bank of Canada has been on hold since April, with financial markets anticipating no change in the policy rate this week.
  • The Fed is dealing with additional complications, including its independence and the President's attacks on Fed chair Jerome Powell.
  • U.S. inflation has begun to tick higher, rising to an annual rate of 2.7 per cent in June from 2.4 per cent in May, and economists think more inflation is likely in the pipeline for the second half of the year.
  • Royal Bank of Canada economists Mike Reid and Carrie Freestone predict the Fed may need to remain on hold through the fall, with a risk that it will need to wait until 2026 for the tariff impacts to subside.
  • The main reason for the Bank of Canada's likely hold on interest rates is that inflation remains on the hot side, with measures of core inflation stuck at 3 per cent since April.
  • Other recent economic data have come in stronger than expected, mitigating the need for an emergency rate cut to support the tariff-battered economy.
  • Canada added 83,000 jobs in June, and the unemployment rate moved down a notch to 6.9 per cent, with Gross Domestic Product growing 2.2 per cent in the first quarter.

Statistics:

  • The Bank of Canada's policy rate is at 2.75 per cent.
  • The U.S. Federal Reserve's benchmark federal funds rate is in the 4.25 per cent to 4.5 per cent range.
  • U.S. inflation is at an annual rate of 2.7 per cent.
  • Canada's inflation rate is 1.9 per cent, below the central bank's 2-per-cent target.
  • The Bank of Canada has been on hold since April.
  • Financial markets are pricing in less than 10-per-cent odds of a cut by the Bank of Canada.
  • Interest rate swap markets are pricing in only one quarter-point cut by the end of the year.

Sources:

  • The Bank of Canada and the U.S. Federal Reserve
  • Bank of Nova Scotia's Derek Holt
  • Royal Bank of Canada economists Mike Reid and Carrie Freestone
  • Franklin Templeton's Darcy Briggs
  • A Reuters poll of 28 economists