OTTAWA — The Bank of Canada has announced it will maintain its target for the overnight interest rate at 2.75%, with the Bank Rate at 3% and the deposit rate at 2.70%, citing growing global uncertainty and inflationary pressures stemming from ongoing U.S. trade actions.
In its July Monetary Policy Report, the Bank opted not to issue conventional GDP and inflation forecasts due to the volatile nature of international trade policy. Instead, it laid out three scenarios based on current, escalating, and de-escalating tariff conditions.
Despite escalating U.S. tariffs and unpredictable trade moves, the Canadian economy has shown resilience, though cracks are beginning to show. After a strong first quarter in 2025—driven by exporters rushing to beat tariffs—Canada’s GDP is estimated to have shrunk by 1.5% in Q2. Business investment and household spending are weakening under the weight of uncertainty.
The labour market is softening, particularly in sectors exposed to trade, with the unemployment rate climbing to 6.9% in June. Wage growth is also cooling.
In the current tariff scenario, the Bank expects modest economic growth of about 1% in the second half of 2025, with a gradual pickup toward 2% in 2027. Inflation remains steady, sitting at 1.9% in June, though excluding taxes, it has risen to 2.5%, largely due to higher non-energy goods prices and ongoing shelter cost pressures.
While underlying inflation is still elevated, Governor Tiff Macklem and the Governing Council chose caution over action, leaving rates unchanged for now. However, a potential rate cut remains on the table if downward pressures from a weakening economy outweigh inflation risks from trade-related costs.
“We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval,” the Bank said in a statement. “We will support economic growth while ensuring inflation remains well controlled.”
The Bank of Canada emphasized it is watching key risk factors closely, including the effect of U.S. tariffs on Canadian exports and inflation, and the pace at which businesses pass increased costs on to consumers.
Next rate decision: September 17, 2025.
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