Bank of Canada Holds Policy Rate at 2.75% Once Again

The Bank of Canada announced Wednesday that it will maintain its key interest rate at 2.75%, citing the country's continued economic resilience despite mounting global trade tensions, particularly those driven by the United States.

Bank governor Tiff Macklem said the decision was based on a "clear consensus" among policymakers. Despite the uncertainty surrounding international trade, the Canadian economy has shown no significant signs of weakening, and core inflation remains persistent.

This marks the third consecutive rate hold, following similar decisions in April and June. Economists had largely anticipated this move, given the looming trade deadline and ongoing negotiations.

The central bank typically lowers interest rates to encourage economic growth and raises them to contain inflation. Macklem noted that recent international agreements have eased fears of a major trade crisis, and while some tariffs remain in place, the impact has so far been manageable.

However, Macklem emphasized that the bank is prepared to cut rates if future conditions warrant it. "We’re always monitoring new developments closely," he said, referencing the ongoing Canada-U.S. trade situation.

Cautious Outlook Amid Uncertainty

While the U.S. has made recent trade pacts with countries like Japan and the EU, Macklem pointed out that these deals still include tariff provisions, suggesting a broader return to free trade isn't imminent.

He acknowledged that certain sectors are still suffering due to tariffs and said the central bank is watching for signs that higher import costs are being passed on to consumers or dampening business activity.

The bank's monetary policy report, released alongside the rate announcement, outlined three potential scenarios rather than a single forecast—reflecting the unpredictability surrounding tariffs. These include:

• Status Quo Scenario: Current tariffs remain, with GDP expected to grow more slowly—by 0.5 percentage points less in 2025 and 2026 compared to January forecasts. Inflation is projected to hover around 2% through 2027.

• De-escalation Scenario: Tariffs are reduced, inflation eases, and economic growth picks up.

• Escalation Scenario: The U.S. imposes sweeping new tariffs—10% on all Canadian and Mexican goods, and 50% on copper. Canada retaliates with 25% tariffs on $120 billion of U.S. imports. This would push Canada into recession for the rest of 2025 and lead to higher inflation.

Currently, the effective U.S. tariff rate on Canadian goods stands at approximately 7–8%, up from about 2% earlier this year.

Despite headline inflation reaching 1.9% in June, the bank estimates that core inflation—excluding volatile items and tax impacts—is closer to 2.5%.

Rate Cut Still on the Table

Economists like Jimmy Jean of Desjardins believe a rate cut may still be coming, potentially as soon as September. "If we're going to feel more economic pain, the bank has to act early," Jean said, noting that monetary policy must anticipate, not react to, downturns.

Political Independence

Responding to questions about political influence, Macklem stressed that the bank's decision was independent and not in response to calls from political figures like Ontario Premier Doug Ford, who had urged a rate cut.

"Our priority is to prevent trade-related issues from fueling inflation," Macklem said.

The bank also expects that most Canadian exports will remain tariff-exempt under the Canada-U.S.-Mexico Agreement (CUSMA), as companies strive for certification to maintain compliance.

Trade Deadline Looms

With U.S. President Donald Trump threatening a 35% tariff on Canadian goods if a trade agreement isn’t reached by August 1, uncertainty remains high. Though this scenario wasn’t explicitly modeled in the bank’s report, it looms large over economic projections.

As of now, the central bank expects the economy to begin recovering later this year, following an estimated 1.5% annualized GDP contraction in the last quarter.

The Canadian Press

July 30, 2025