Bank of Canada warns Q4 growth could be halved by US tariffs

Bank of Canada Governor Tiff Macklem delivered a pointed warning during his September 2 monetary policy press conference: if the latest round of US tariffs stays in place, fourth-quarter growth in Canada could be cut roughly in half.

The culprit is a fresh batch of 50% US tariffs imposed on approximately 5% of Canadian goods exports, effective August 22. Canada isn’t taking it quietly, with dollar-for-dollar counter-tariffs set to kick in on September 8.

Steady hands, shaky ground

Despite the tariff headwinds, the Bank of Canada opted to hold its overnight policy rate at 2.25% for the seventh consecutive meeting. That decision reflects a balancing act between acknowledging real trade risks and not overreacting to what Macklem characterized as a targeted, rather than economy-wide, shock.

The rate hold came against the backdrop of a surprisingly strong second quarter. Canadian GDP grew at an annualized 3.3% in Q2, a broad-based rebound that gave the central bank some breathing room.

Macklem stressed that while the tariffs will significantly hit the sectors they target, the direct impact on the broader Canadian economy should remain modest. Analysts peg the GDP drag from this latest tariff wave at roughly 0.3-0.4%.

Federal government support programs are expected to cushion some of the blow in the most affected industries.

The bigger picture on US-Canada trade

These new tariffs don’t exist in isolation. They land on top of long-standing duties on Canadian steel and aluminum that have been a persistent irritant in cross-border commerce.

Macklem flagged that the chilling effect on business investment and hiring could extend well beyond the sectors directly caught in the tariff crosshairs.

Compounding the tension is the looming review of CUSMA, the US-Mexico-Canada trade agreement that replaced NAFTA, giving businesses one more reason to delay major commitments.

For a country that sends roughly three-quarters of its exports south of the border, every escalation in US trade policy carries outsized weight.

Inflation pressures complicate the playbook

The Bank of Canada is simultaneously grappling with inflationary pressures from energy markets. Soaring oil prices, driven in part by ongoing conflicts in the Middle East, are pushing costs higher across the economy.

This creates a particular policy dilemma. Tariff-related growth risks would normally argue for rate cuts, but elevated oil prices feeding into inflation argue for keeping rates where they are. The Bank of Canada chose to hold at 2.25%.

Portfolio managers with significant Canadian exposure may want to stress-test their holdings against a scenario where Q4 growth comes in at half of current projections — an outcome Macklem put explicitly on the table if tariffs persist through year-end.

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