The Bank of Canada kept interest rates unchanged, cautiously responding to trade uncertainty and economic challenges
2025-07-30 23:37:04
On July 30, 2025, the Bank of Canada announced that it would maintain the key policy interest rate at 2.75% for the third consecutive time, in line with market expectations.
Bank of Canada Governor Macklem stated at a press conference that the Canadian economy has demonstrated some resilience to date, with core inflation nearing 2.5%, slightly above the official reading of 3%. He noted, "Overall, there is reason to believe that the recent upward trend in underlying inflation will gradually subside." The central bank emphasized that the reason for maintaining interest rates unchanged is due to the resilience of the economy and the continued existence of underlying inflationary pressures. However, it also left room for possible rate cuts in the future, stating that if the economy weakens further and upward inflationary pressures remain manageable, a rate cut may become necessary.
Money markets are pricing in a greater than 81 percent chance that the Bank of Canada will keep interest rates unchanged in September, but future data developments will be crucial.
Economic Forecast and Tariff Scenario Analysis
Due to uncertainty about U.S. trade policy, the Bank of Canada forgoes publishing detailed economic baseline forecasts for the second consecutive quarter, instead proposing three different tariff scenarios to respond to changes in the global trade environment:
Current Tariff Scenario: Assuming the United States maintains current tariff levels on steel, aluminum, autos, and goods outside the USMCA, Canada's GDP is projected to contract by 1.5% in the second quarter of 2025, but rebound to 1% growth in the second half of the year, reaching 1.8% in 2027. Headline inflation is projected to stabilize near the 2% target over the next two years.
Downgrade scenario: If global tariff levels fall, it will improve economic growth prospects and reduce direct cost pressures on inflation.
Escalation scenario: If tariffs rise, it will further weaken the economy and increase inflationary pressures.
Macklem said: "Since April, the risk of a serious escalation of global trade conflicts has weakened, but there is still great uncertainty about the evolution of U.S. trade policy." He further pointed out that even if the United States and Canada reach an agreement before the August 1 trade agreement deadline, uncertainty will continue, and Canada needs to think about its position in global trade and promote trade diversification.
The central bank governor stated: both caution and flexibility are important
Macklem repeatedly stressed the central bank's high level of vigilance against uncertainty in his speech. He said: "When faced with extraordinary uncertainty, it is difficult to make forward-looking predictions as usual."
He noted that the "unpredictability" of U.S. trade policy makes it necessary to consider tariff risks when formulating monetary policy. Furthermore, he mentioned that exports may not rebound significantly in the third quarter, and the reality of tariffs will reduce economic efficiency and revenue.
Macklem also said the central bank was ready to adjust policy quickly based on new information, emphasizing the importance of supporting economic growth while ensuring inflation was under control.
Expert analysis
The central bank's decision and statement have sparked widespread discussion in the market and among analysts.
Regarding the Canadian dollar, Carl Shamota, chief market strategist at Corpay, said the central bank's pessimistic outlook for the economic outlook and its signal of readiness to resume rate cuts will put pressure on the Canadian dollar. He predicted that the USD/CAD exchange rate could rise to 1.39 by September, depending on the overall direction of the US dollar. Following the release of the monetary policy report, the Canadian dollar fell 0.30% to 1.3811 Canadian dollars against the US dollar.
Regarding interest rate cut expectations, Bradley Saunders of Capital Economics believes that the central bank is more concerned about the downside risks of tariffs on economic growth rather than the upward pressure on inflation. He predicts that there may be two rate cuts this year, bringing the benchmark rate to 2.25%.
Royce Mendes of Desjardins noted that the two forecast scenarios in the central bank's report suggest the need for future interest rate cuts, and the decline in short-term and medium-term yields on Canadian government bonds also reflects market expectations of loose policies.
On the economic outlook, Andrew DiCapua of the Canadian Chamber of Commerce said economic weakness paves the way for a rate cut in the fall, but the central bank will remain on the sidelines in the coming months until economic signals become clearer.
Tony Stilo and Michael Davenport of the Oxford Economics Institute noted that the approaching August 1 deadline for the US-Canada trade agreement and the uncertainty surrounding President Trump's threat to impose a 35% tariff on Canadian goods remain key factors for the central bank to remain cautious.
The money market predicts a greater than 81% chance that the Bank of Canada will keep interest rates unchanged in September, but future data will be crucial. Andrew Grantham of Canadian Imperial Bank of Commerce said, "The central bank appears to be increasingly convinced that further rate cuts are needed to support the economy, but it's clearly not there yet. Future data will be even more important."
The trade and inflation balance
The Bank of Canada noted in its report that despite the tariffs imposed on three sectors, the overall economic impact remains manageable, with strong job growth and solid core inflation. However, Macklem warned that some factors that could lead to an increase in core inflation should gradually ease. He stated, "If a weakening economy puts further downward pressure on inflation, while upward price pressures from trade disruptions are manageable, a reduction in the policy rate may be necessary." This statement demonstrates the central bank's efforts to strike a balance between economic growth and inflation control.
Future Outlook
With the August 1st deadline for the US-Canada trade agreement approaching, market attention to Canada's economy and monetary policy will intensify. The Bank of Canada stated that it will continue to closely monitor tariff developments and core inflation indicators, responding flexibly to potential risks. Macklem emphasized the need for Canada to explore trade diversification to reduce its reliance on a single market, while ensuring that monetary policy supports economic growth and price stability.
Bank of Canada Governor Macklem stated at a press conference that the Canadian economy has demonstrated some resilience to date, with core inflation nearing 2.5%, slightly above the official reading of 3%. He noted, "Overall, there is reason to believe that the recent upward trend in underlying inflation will gradually subside." The central bank emphasized that the reason for maintaining interest rates unchanged is due to the resilience of the economy and the continued existence of underlying inflationary pressures. However, it also left room for possible rate cuts in the future, stating that if the economy weakens further and upward inflationary pressures remain manageable, a rate cut may become necessary.
Money markets are pricing in a greater than 81 percent chance that the Bank of Canada will keep interest rates unchanged in September, but future data developments will be crucial.
Economic Forecast and Tariff Scenario Analysis
Due to uncertainty about U.S. trade policy, the Bank of Canada forgoes publishing detailed economic baseline forecasts for the second consecutive quarter, instead proposing three different tariff scenarios to respond to changes in the global trade environment:
Current Tariff Scenario: Assuming the United States maintains current tariff levels on steel, aluminum, autos, and goods outside the USMCA, Canada's GDP is projected to contract by 1.5% in the second quarter of 2025, but rebound to 1% growth in the second half of the year, reaching 1.8% in 2027. Headline inflation is projected to stabilize near the 2% target over the next two years.
Downgrade scenario: If global tariff levels fall, it will improve economic growth prospects and reduce direct cost pressures on inflation.
Escalation scenario: If tariffs rise, it will further weaken the economy and increase inflationary pressures.
Macklem said: "Since April, the risk of a serious escalation of global trade conflicts has weakened, but there is still great uncertainty about the evolution of U.S. trade policy." He further pointed out that even if the United States and Canada reach an agreement before the August 1 trade agreement deadline, uncertainty will continue, and Canada needs to think about its position in global trade and promote trade diversification.
The central bank governor stated: both caution and flexibility are important
Macklem repeatedly stressed the central bank's high level of vigilance against uncertainty in his speech. He said: "When faced with extraordinary uncertainty, it is difficult to make forward-looking predictions as usual."
He noted that the "unpredictability" of U.S. trade policy makes it necessary to consider tariff risks when formulating monetary policy. Furthermore, he mentioned that exports may not rebound significantly in the third quarter, and the reality of tariffs will reduce economic efficiency and revenue.
Macklem also said the central bank was ready to adjust policy quickly based on new information, emphasizing the importance of supporting economic growth while ensuring inflation was under control.
Expert analysis
The central bank's decision and statement have sparked widespread discussion in the market and among analysts.
Regarding the Canadian dollar, Carl Shamota, chief market strategist at Corpay, said the central bank's pessimistic outlook for the economic outlook and its signal of readiness to resume rate cuts will put pressure on the Canadian dollar. He predicted that the USD/CAD exchange rate could rise to 1.39 by September, depending on the overall direction of the US dollar. Following the release of the monetary policy report, the Canadian dollar fell 0.30% to 1.3811 Canadian dollars against the US dollar.
Regarding interest rate cut expectations, Bradley Saunders of Capital Economics believes that the central bank is more concerned about the downside risks of tariffs on economic growth rather than the upward pressure on inflation. He predicts that there may be two rate cuts this year, bringing the benchmark rate to 2.25%.
Royce Mendes of Desjardins noted that the two forecast scenarios in the central bank's report suggest the need for future interest rate cuts, and the decline in short-term and medium-term yields on Canadian government bonds also reflects market expectations of loose policies.
On the economic outlook, Andrew DiCapua of the Canadian Chamber of Commerce said economic weakness paves the way for a rate cut in the fall, but the central bank will remain on the sidelines in the coming months until economic signals become clearer.
Tony Stilo and Michael Davenport of the Oxford Economics Institute noted that the approaching August 1 deadline for the US-Canada trade agreement and the uncertainty surrounding President Trump's threat to impose a 35% tariff on Canadian goods remain key factors for the central bank to remain cautious.
The money market predicts a greater than 81% chance that the Bank of Canada will keep interest rates unchanged in September, but future data will be crucial. Andrew Grantham of Canadian Imperial Bank of Commerce said, "The central bank appears to be increasingly convinced that further rate cuts are needed to support the economy, but it's clearly not there yet. Future data will be even more important."
The trade and inflation balance
The Bank of Canada noted in its report that despite the tariffs imposed on three sectors, the overall economic impact remains manageable, with strong job growth and solid core inflation. However, Macklem warned that some factors that could lead to an increase in core inflation should gradually ease. He stated, "If a weakening economy puts further downward pressure on inflation, while upward price pressures from trade disruptions are manageable, a reduction in the policy rate may be necessary." This statement demonstrates the central bank's efforts to strike a balance between economic growth and inflation control.
Future Outlook
With the August 1st deadline for the US-Canada trade agreement approaching, market attention to Canada's economy and monetary policy will intensify. The Bank of Canada stated that it will continue to closely monitor tariff developments and core inflation indicators, responding flexibly to potential risks. Macklem emphasized the need for Canada to explore trade diversification to reduce its reliance on a single market, while ensuring that monetary policy supports economic growth and price stability.
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