Bank of Canada keeps its policy rate at 2.25%, says tariffs could hit growth

OTTAWA, Sept. 2 (Reuters) - The Bank of Canada kept its key policy rate on hold at 2.25% on Wednesday, as widely expected, but said the risks to inflation had grown while new U.S. tariffs made growth prospects more uncertain.

The benchmark rate has now been unchanged for 11 months, even as trade tensions between Canada and the United States have worsened, while the economy and labor market have held up relatively well.

U.S. President Donald Trump’s latest 50% tariffs on some Canadian imports took effect after the second-quarter GDP data and economists have said the measures could hurt business and consumer sentiment. Canada’s retaliatory tariffs, which could add to inflationary pressures, take effect next week.

"New U.S. tariffs and Canadian counter-tariffs will also raise costs for some businesses and could feed into consumer prices over time," the bank said.

"The upside risks to inflation have increased, while new tariffs make growth prospects more uncertain."

Canada's economy rebounded at an annualized rate of 3.3% in the second quarter, but now faces competing risks from the escalating trade dispute. U.S. tariffs threaten to weaken growth, while Canada's dollar-for-dollar retaliation could put upward pressure on domestic prices.

Economists have said the conflicting risks gave the central bank room to wait and assess the impact of the tariffs before changing borrowing costs.