BMO says the Bank is on hold, but worsening trade tensions could reopen the door to rate cuts
The White House's decision to impose 50% tariffs on a targeted range of Canadian goods has renewed uncertainty over the Bank of Canada's rate path, reinforcing economist forecasts that the central bank will remain on hold for the rest of 2026, while leaving the door open to easing if trade conditions worsen.
The duties, announced under Section 338 of the Tariff Act of 1930, are due to take effect on August 19th and would cover roughly C$28 billion worth of Canadian exports to the United States, including alcoholic beverages, cement, dairy products, wood and paper products, chemicals, plastics, and electronics.
Energy, potash, critical minerals, fish, and goods already subject to tariffs under Section 232 are exempt. The measures represent approximately 5% of Canadian goods exports to the US and 0.8% of Canadian gross domestic product.
The most significant aspect of the announcement is that the new tariffs would apply to goods covered under the Canada-United States-Mexico Agreement (CUSMA), breaking from the existing trade environment where the vast majority of Canadian exports had continued to move tariff-free under the continental trade deal.
Prime Minister Mark Carney said the measures violate the agreement and would raise costs for American consumers.
Fresh US tariffs on Canadian goods are raising new questions for the housing market, with renewed uncertainty clouding buyer confidence and the outlook for mortgage rates and the broader economy.https://t.co/cklHjg8ES1
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 21, 2026
What it means for the Bank of Canada
Robert Kavcic, senior economist and director at BMO Economics in Toronto, said the tariff announcement — coming on the heels of a well-behaved Canadian inflation report — is "just a reminder that uncertainty on the trade front has not gone away."
BMO believes the Bank of Canada is firmly on hold this year, and that any rate increase would need to be considered very carefully at this stage.
Should trade relations between Canada and the US deteriorate further, Kavcic said the resulting economic risks could "open the door to easing again."
For mortgage brokers advising clients on renewal and rate strategy, that is a critical signal. Bond market conditions can tighten even without the central bank moving, a dynamic already weighing on lender pricing.
Growth risks and the GDP drag
Andrew Hencic, director and senior economist at TD Economics in Toronto, estimates that the tariffs could subtract between 0.3 and 0.6 percentage points from Canadian GDP growth over the next year if they remain in place, with the actual impact expected to track toward the lower end of that range.
He noted that the targeted products appear to have been selected partly because US demand will respond quickly to higher duties, a pattern already seen in Canadian iron and steel exports, which are down roughly 50% from pre-tariff levels.
Businesses are also expected to front-run the August 19th deadline by accelerating shipments, adding volatility to upcoming trade data.
TD said the full economic impact will likely not emerge in the data until September, meaning the broader effect on the housing market and household borrowing conditions will not fully show through until late 2026.
The 30-day implementation window leaves room for negotiation, and legal challenges are widely expected to follow.
For now, brokers tracking the Bank of Canada's rate outlook for 2026 are advised to plan for a prolonged hold, with the next move, if any, more likely to be downward than upward.
Financial markets showed little reaction to the announcement.
The Canadian dollar was down approximately 0.2% shortly after the news, and rate expectations for the Bank of Canada were largely unchanged, according to TD Economics.
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