By Promit Mukherjee
OTTAWA, Sept 2 (Reuters) - The Bank of Canada is widely expected to keep its key policy rate unchanged at 2.25% on Wednesday as recent strong economic growth gives it room to wait while a renewed trade war with the United States clouds the outlook.
Canada's economy grew at an annualized rate of 3.3% in the second quarter, above the central bank's 2.5% forecast, as exports jumped and domestic demand strengthened. Business investment and household spending also rebounded.
But that
improvement came before U.S. President Donald Trump's new 50% tariffs on about $20 billion of Canadian goods took effect last month and Canada announced retaliatory duties on U.S. imports. Canada's retaliatory tariffs take effect next week.
The conflicting forces leave the central bank with little reason to move borrowing costs in either direction until it gets a clearer picture of how the trade dispute affects growth and prices.
"The risks are evolving, the risks are broadening," said Randall Bartlett, deputy chief economist at Desjardins Group.
"But the risks still remain broadly balanced around inflation," he said, adding that moving rates now would be pre-emptive before the bank understands how lasting the tariff changes will be and what their economic impact will be.
Inflation offers little justification for a move in either direction. Headline inflation accelerated to 3% in July, the top of the BoC's 1%-3% control range, largely because of higher gasoline prices, while the central bank's preferred measures of core inflation hovered around its 2% target.
Bartlett said higher energy prices and Canada's retaliatory tariffs posed upside risks to inflation, while weaker exports, business investment and hiring due to the trade war could push unemployment higher and exert downward pressure on prices.
All 35 economists polled by Reuters expect the BoC to leave rates unchanged on Wednesday, while money markets are pricing roughly a 94% probability of no move.
Besides solid second-quarter growth, the labor market has also strengthened, with the unemployment rate falling to a two-year low of 6.4% in July after strong job gains, although the jobless rate remains high by historical standards.
Economists have cautioned against reading too much into the second-quarter rebound, as growth was partly driven by a restart from unplanned shutdowns of some car manufacturing plants, higher oil prices, government support and the soccer World Cup, which Canada jointly hosted.
The BoC will announce its decision at 9:45 a.m. ET (1345 GMT).
(Reporting by Promit Mukherjee; Editing by Andrea Ricci )
