Central bank keeps interest rate at 2.75 percent
The Bank of Canada (BoC) left its overnight interest rate unchanged at 2.75 percent on Wednesday, reflecting ongoing concerns about global trade tensions, particularly those involving the United States. The hold was widely anticipated by economists, who cited both domestic economic resilience and persistent external risks as influencing the decision.
Governor Tiff Macklem emphasized the unpredictability of U.S. tariffs, noting that the BoC would continue to provide multiple economic outlooks rather than a singular forecast. “U.S. policy remains too uncertain to offer a single economic projection,” he said. The Monetary Policy Report released alongside the announcement outlines three scenarios tied to the trajectory of trade tensions, including escalation and de-escalation possibilities.
Inflation and domestic resilience weigh on decision
Macklem also pointed to underlying inflationary pressures within Canada, as well as relative economic stability, as justification for holding the rate. However, he acknowledged that further cuts remain on the table should inflation ease and economic momentum weaken. “If a slowing economy places more downward pressure on inflation while trade-related price increases are contained, a policy rate cut may be necessary,” he stated.
While core inflation remains elevated, the BoC expects it to gradually moderate due to strengthening of the Canadian dollar, slower wage growth, and slack in the economy. The Bank forecasts an economic contraction in the second quarter of 2025, with modest recovery expected later in the year.
Market divided on next steps
Following the announcement, analysts expressed differing views on the likely trajectory of Canadian interest rates. While National Bank of Canada economists highlighted that the BoC has not closed the door on cuts, they also emphasized that conditions for further easing are strict. BMO’s Douglas Porter noted that a September cut would likely require two favorable inflation readings before the next policy meeting.
Desjardins Group economists, however, see a higher probability of rate cuts. They expect up to three reductions this year, beginning in September. Their forecast is supported by weaker-than-expected tariff revenue and the possibility of inflation running below current projections, potentially giving the BoC room to ease monetary policy.
Trade war impact continues to dominate outlook
All three BoC forecast scenarios account for tariff effects. Even under the current environment — which includes tariffs that are lower than those previously threatened by the U.S. — Macklem warned that economic recovery would remain subdued. “Tariffs reduce efficiency and income, leading to weaker consumption. Growth will resume, but on a permanently lower path,” he said.
This continued uncertainty over trade policy has prompted the BoC to depart from its standard approach, opting again for a multi-scenario report to account for various outcomes. Economists will now look to upcoming inflation data to assess whether the BoC’s cautious tone signals future rate action or a prolonged hold.