Strong trade data could bring forward a BoC rate hike
Canada's stronger-than-expected trade performance and increased inflationary pressures could prompt the Bank of Canada to raise interest rates sooner than expected, said Kari Norman, senior economist at Desjardins.
The assessment follows a surprisingly strong Canadian merchandise trade report for August, which showed the country's trade surplus grew to $4.2 billion, the widest since May 2022 and the sixth straight monthly surplus. Desjardins anticipates real GDP growth of around 2% annualized in the third quarter, above the Bank of Canada’s recently published outlook.
"Still, uncertainty surrounding U.S. trade policy remains a headwind to growth,” Norman wrote in a research note. “On the other hand, sustained high energy prices amid the ongoing conflict in the Middle East, alongside retaliatory tariffs, is adding to inflationary pressures. This could bring forward the timing of the Bank’s next rate hike from our current call for Q1 2027.”
Eight of Canada's 11 major export categories recorded month-over-month gains, including a 4.7% increase in energy exports and a 6.6% rise in consumer goods exports. Shipments to the U.S. increased 8.1%.
Nathan Janzen, assistant chief economist at Royal Bank of Canada, cautioned that some of the improvement was driven by temporary factors. “Some U.S. buyers clearly rushed to import ahead of new tariffs,” which were imposed on Aug. 22., Janzen wrote. “That boost will reverse in September.”
He also noted that non-U.S. exports grew 40% year-over-year compared to a 24% increase in sales to the U.S.
Despite tariff-related uncertainty, both economists pointed to signs of resilience in the Canadian economy.
“We continue to expect the new tariffs imposed by the U.S. administration will have a significant impact on directly targeted sectors but with more than 80% of Canadian exports to the U.S. still maintaining duty free access under CUSMA we expect limited spillover to the broader economy,” Janzen wrote. “We remain cautiously optimistic that the economy will continue to gradually improve on a per-person and per-worker basis.”
The Bank of Canada’s current rate is 2.25%. The next rate announcement will take place Oct. 28.
