The Bank of Canada Holds Its Key Interest Rate Steady

When Should We Expect a Cut?

On Wednesday, July 30, the Bank of Canada held its key interest rate at 2.75%, citing ongoing uncertainty around tariffs and the outcome of trade negotiations between Canada and the US. The rate has now remained unchanged since March. Alongside the rate announcement, the Bank published its latest Monetary Policy Report, noting that "amid heightened uncertainty around US trade policy, the outlook for the Canadian economy remains clouded."

The decision to hold rates steady for a third consecutive month was widely expected by Canada's major banks, given that inflation remains close to the Bank of Canada's 2% target.

Ontario Premier Doug Ford said shortly after the news broke that he was "shocked" by the Bank's decision. "Facing economic uncertainty that threatens hundreds of thousands of jobs, it's more important than ever to stimulate economic growth and keep Canadians employed," Ford wrote on social media. "Rather than waiting and letting President Trump's tariffs do even more damage to our economy, the Bank of Canada should be cutting interest rates right now."

Asked about his reaction to the Ontario Premier's comments, Bank of Canada Governor Tiff Macklem said he makes decisions independently of the political process, based on the Bank's "best judgment." "I want to stress that the experience of the past few years has made it very clear just how much Canadians dislike inflation," the central bank chief said. "We'll support the economy through this period of turmoil, but at the same time, we're going to make sure... the tariff problem doesn't turn into an inflation problem."

Without naming Trump directly, the Bank noted that some clarity has emerged in the "global trade conflict," given recent trade agreements the US has struck with other countries. In Canada, however, persistent uncertainty is compounded by a high likelihood that tariffs will remain in place. The Bank noted the difficulty of forecasting which tariffs and countermeasures will be introduced, how long they'll last, how trade negotiations will unfold, and how households and businesses will respond and adapt.

Given the lack of clarity on these fronts, the Bank of Canada didn't present baseline forecasts for GDP growth or inflation on Wednesday, neither for Canada nor for the world. Instead, the July report outlines three scenarios based on possible trade outcomes:

Tariffs holding at their current level
"De-escalation" - a reduction in tariffs
"Escalation" - a significant tightening of tariffs, under which Canada would lose CUSMA protection

Commenting on the decision, Macklem said that "the absence of a traditional forecast doesn't prevent us from making monetary policy decisions," but acknowledged the scenarios rest "on a range of assumptions." "Unusually high uncertainty means we need to pay closer attention to risks, look at a shorter horizon than usual, and stand ready to respond to new information," he said.

Under the current scenario, global economic growth is expected to slow by year's end, whereas an easing of tariffs would accelerate the recovery, and a sharp escalation of the trade war would push the economy into a downturn in the second half of 2025. "If a weaker economy puts additional downward pressure on inflation, and price increases driven by trade tensions remain contained, a rate cut may be warranted," Macklem said, laying out the conditions that could prompt a change in rates.

The Bank's Governor also noted that the Canadian economy is "showing resilience," even though growth in business and household spending is being held back by uncertainty. And while the labour market has weakened in sectors hit hardest by the trade conflict, employment has held steady elsewhere. "Inflation came in at 1.9% in June, ticking up slightly from the previous month. Excluding taxes, inflation rose to 2.5% in June, compared to roughly 2% in the second half of last year," the Bank's statement noted.

Asked whether the prolonged trade war between Canada and the US would have a lasting impact on the country's economy, Macklem said yes. "Unfortunately, the unfortunate reality is that tariffs make the economy less efficient. That means lower incomes, and therefore less consumption," he said. "So yes, the economy will resume growing, but from a lower level, and in that sense, tariffs really do have a lasting effect, until they're removed."

Desjardins Chief Economist Jimmy Jean, commenting on the Bank's decision, noted that while the effects on inflation aren't showing up yet, many companies' margins have already been squeezed, and if new tariffs are introduced, those costs will most likely get passed on to consumers. "I think we're still very much in wait-and-see mode," he said. "When will the effects of tariffs show up, and in what form? How long will it last? What decisions will get made? Unfortunately, this is going to be the dominant story through the rest of the year."

On the other hand, Charles St-Arnaud, chief economist at Alberta Central and a former Bank of Canada staffer, told Bloomberg that "the economy has stopped getting worse." "We're no longer in that April-May situation, where uncertainty was so high, and the shock to consumers and businesses so severe, that spending slowed sharply. We're now seeing confidence start to recover."

So far, the Canadian economy has avoided the worst-case scenarios some experts were forecasting earlier this year, when Trump first began threatening tariffs.

Ashish Dewan, an investment strategist at Vanguard Canada, expects a 0.50% rate cut to 2.25% by year's end, "amid slowing growth."

RSM economist Joe Brusuelas agrees, expecting the Bank of Canada to cut rates twice more this year. "Much like in the US, the Canadian economy is still strong enough, for now, to absorb the hit from trade tensions. Businesses are continuing to hire despite the strain," he told Bloomberg. "If that trend continues, unemployment should keep falling, which would give the Bank of Canada room to resume easing." St-Arnaud added that the June employment numbers, which unexpectedly rose (+83,000 jobs), are worth watching closely, though monthly reports can be volatile. "Sometimes you get an unusually high or low reading that distorts the trend... you need to wait for more data," he explained.

Overall, the labour market remains soft, though not as weak as many feared at the start of the trade war. "The Bank of Canada is signaling that further rate cuts are likely, but they're in no rush. Right now, the priority is gathering more data," St-Arnaud concluded.

The Bank of Canada's next overnight rate decision is scheduled for September 17.