CIBC economist Avery Shenfeld noted that the decline in the Canadian currency complicates the Bank of Canada's rate forecasts amid trade disputes with the US.
Economist Avery Shenfeld of CIBC Capital Markets stated that further weakening of the Canadian dollar could complicate the Bank of Canada's decisions on interest rates. According to him, this is especially relevant against the backdrop of trade disagreements that threaten economic growth within the country.
Since the beginning of summer 2025, the Canadian currency has lost about 5% of its value relative to the Bank of Canada's trade-weighted basket. Historical models show that such a decline may add roughly 0.3 percentage points to inflation at the moment of peak impact. Part of this effect has already been reflected in consumer prices.
If the US Federal Reserve raises rates while the Bank of Canada leaves its policy unchanged, pressure on the exchange rate may intensify. A weak dollar makes imports more expensive and thereby supports inflation, but at the same time helps exporters through increased competitiveness of Canadian goods.
CIBC believes that the inflationary consequences will most likely prove temporary and will not force the regulator to raise rates. The Bank of Canada will also have to take into account risks related to American tariffs and weakening domestic demand.
According to the bank's forecast, annual inflation in Canada in September will rise to 3.2% from 3.0% in August, mainly due to higher gasoline prices. Core inflation, according to expectations, will remain closer to 2%, which supports the idea of keeping rates unchanged.
Additional pressure on the economy may come from an escalation of trade conflicts, including the possible introduction of a 50% US tariff on Canadian cars and parts from January 1. If oil prices fall at the same time, the Bank of Canada may consider cutting rates next year, which would weaken the currency even further.
The bank emphasized that currency weakening will bring exporters only limited benefits, since many manufacturers depend on components priced in US dollars. Improvement in competitiveness will likely affect only sectors not impacted by tariffs.