The Bank of Canada may be willing to tolerate a modest rise in inflation from Ottawa's new countertariffs if it means shielding the economy from a sharper slowdown, according to a new analysis from Rosenberg Research.
The independent economics firm estimates that Canada's retaliatory duties—set to hit certain US imports at rates as high as 50% starting September 8—could add no more than 0.3 percentage point to headline inflation. But the bigger concern is growth: Rosenberg thinks the trade shock could reduce real economic growth by roughly 0.5 percentage point from its baseline.
That asymmetry is the crux of the matter. A one-time price jump from tariffs is the kind of thing central banks often "look through," especially if it doesn't feed into broader, ongoing inflation. A hit to growth, by contrast, is harder to ignore because it directly affects jobs and incomes.
Why the Bank of Canada might look past the inflation bump
Central banks typically set interest rates with an eye on the medium term, not temporary swings in prices. If a tariff-driven price increase is a one-off—say, a one-time jump in the cost of imported goods—it may not change the underlying inflation trend. Policymakers can "look through" such blips if they believe inflation expectations remain anchored and there's little risk of a wage-price spiral.
Rosenberg's estimate suggests the inflation effect is small enough to fall into that category. The bigger risk is on the demand side. Tariffs raise costs for businesses and consumers, which can dampen spending and investment. A 0.5 percentage point drag on growth is meaningful for an economy that has been struggling to gain momentum.
That trade-off—slightly higher prices versus slower growth—could tilt the Bank of Canada toward a more accommodative stance. In other words, the central bank might keep interest rates lower or even cut them to support the economy, accepting the temporary inflation overshoot as the price of avoiding a deeper downturn.
What this means for investors
For everyday investors, the key takeaway is that the Bank of Canada's next moves will likely be shaped more by growth concerns than by inflation worries. If the central bank signals it's willing to tolerate higher inflation to protect the economy, that could influence everything from bond yields to the Canadian dollar.
Lower interest rates tend to be positive for stocks, especially in rate-sensitive sectors like real estate and utilities, but they can also weigh on the currency. A softer loonie might help exporters but make imported goods more expensive, adding to the very inflation the central bank is trying to look past.
Investors should also watch how the trade dispute evolves. The countertariffs are scheduled to take effect in September, but negotiations could change the picture. Any sign of de-escalation would reduce both the inflation and growth impacts.
Rosenberg's analysis comes as other observers are also weighing the effects of tariffs on Canada's outlook. Some economists have noted that Canada's growth outlook has brightened despite the US tariff drag, suggesting the economy may be more resilient than feared. Meanwhile, TSX futures were flat as bank earnings shone but the tariff deadline loomed, underscoring the uncertainty hanging over markets.
The bigger picture
The Bank of Canada has already been navigating a delicate balance between controlling inflation and supporting growth. With inflation having cooled from its peaks, the central bank has more room to prioritize the economy. But if tariff-related price increases prove stickier than expected, that room could shrink.
Rosenberg's numbers are estimates, not certainties. The actual impact will depend on how businesses and consumers respond to the tariffs, whether they pass on costs, and how long the measures stay in place. Still, the analysis highlights the central bank's likely mindset: when faced with a choice between fighting a small inflation bump and preventing a bigger growth slowdown, the Bank of Canada may well choose the latter.
For investors, that means keeping an eye on the Bank of Canada's language in upcoming statements and rate decisions. Any hint that it's willing to look past inflation would be a signal that growth is the priority—and that could have broad implications for portfolios.
