Canada: The Economic Impacts of Announced Reductions in Retaliatory Tariffs

Recently, the Government of Canada announced that it plans to remove the 25% retaliatory tariffs on $44.2B of Canadian goods imports from the United States as of September 1. This includes all goods imports currently subject to counter tariffs except for steel, aluminum and non-CUSMA compliant autos.

Not surprisingly, lower tariffs on Canadian imports from the United States mean lower overall inflation going forward than previously projected (graph 1). Total CPI inflation excluding food and energy should see a pronounced slowdown relative to the forecast in our August 2025 Economic and Financial Outlook External link. (EFO). At 2.4% y/y on average over the next year, we now forecast it to be 0.3 percentage points lower than expected prior to the announcement. The reduction in total CPI inflation should be similar, with a forecast of 1.8% for 2026—below the Bank of Canada 2% target. This puts our forecast for inflation next year at close to the Bank’s de-escalation scenario.

Lower tariffs will not only slow the pace of inflation, but they should also spur stronger economic growth than previously forecasted. We are now estimating that real GDP growth should be boosted by nearly 0.2 percentage points in 2026 relative to our August outlook, with real GDP now forecast to advance by 1.6% next year (graph 2). And given that the removal of retaliatory tariffs should also raise the potential output of the economy, the improved growth outlook should only have a modest offsetting impact on the lower inflation outlook.

While a one-sided reduction in tariffs may have been a difficult decision politically, it is decisively better for the Canadian economy. It will also change the math for the Bank of Canada, allowing it to focus less on underlying inflation and more on the trade-war impacts to the real economy. This reinforces our call for another 25‑basis point interest rate cut in September, and two more in the final quarter of 2025.