Bank of Canada holds key interest rate, citing ‘some’ domestic resilience to U.S. trade disruptions

Today, the Bank of Canada maintained its key interest rate at 2.75 per cent — the same level it’s been since March — citing the continued lack of clarity around tariffs and the outcome of Canada-U.S. trade talks.

On Wednesday, the central bank released its decision on the target for the overnight rate as well as its latest monetary policy report, noting that “with uncertainty about U.S. trade policy still high, the outlook for the Canadian economy remains clouded.”

Holding the rate again this month, for the third straight time, was widely forecasted by the big Canadian banks, with inflation remaining close to the Bank of Canada’s 2 per cent target.

Ontario Premier Doug Ford, shortly after the news broke, said he was “shocked” by the Bank’s decision.

“As we stare down economic uncertainty that’s putting hundreds of thousands of jobs at risk, it’s never been more important to stimulate economic growth and keep Canadians working,” Ford said on social media.

“Rather than wait around and let President Trump’s tariffs do even more damage to our economy, the Bank of Canada needs to cut interest rates now.”

Canada is currently staring down a Friday deadline imposed by U.S. President Donald Trump to reach a new trade deal or face potential 35 per cent tariffs on non-Canada United States Mexico Agreement (CUSMA)-compliant goods, as well as threats of new sectoral tariffs.

Asked to respond to the premiers’ remarks, Governor of the Bank of Canada Tiff Macklem said he takes his decisions independently from the political process, and based on the Bank’s “best judgement.”

“I would underline that the experience of the last few years has really highlighted just how much Canadians don’t like inflation,” said the central banker. “We will support the economy through this period of upheaval, but at the same time, we are going to make sure that... a tariff problem, does not become an inflation problem.”

Macklem presents three scenarios

The central bank, without naming Trump, said there has been some clarity offered on the state of “global trade conflict,” with the U.S. recently inking new trade pacts with some other countries. However, in Canada, the persisting trade unpredictability is layered, and compounded now by the strong likelihood of some level of tariffs lingering post-August 1.

There’s the need to consider how challenging it remains to predict what tariffs and countermeasures will be imposed, how long they could last, how trade negotiations could play out, as well as how households and businesses would react and adapt accordingly, the Bank said.

As a result of the lack of clarity on these factors, on Wednesday the Bank of Canada did not offer a base case projections for GDP growth or inflation, domestically or globally.

Instead, July’s report outlines three scenarios conditional on potential trade outcomes: one based on the current tariff scenario, one called the “de-escalation” scenario in which tariffs are reduced, and a third “escalation” scenario where tariffs are “substantially” increased, essentially seeing Canada losing the shield of CUSMA-compliance.

Macklem, speaking to his decision, told reporters Wednesday that “the lack of a conventional forecast does not impede our ability to take monetary policy decisions,” but conceded the scenarios are based “on a lot of assumptions.”

“The unusual degree of uncertainty does mean we have to put more weight on the risks, we’re looking at over a shorter horizon than usual, and we are ready to respond to new information,” he said.

In the current scenario, global economic growth is set to slow modestly by the end of the year, while the tariff-easing outcome would see economic growth rebound faster, and a dramatic ratcheting up of the trade war would result in economic contraction through the remainder of 2025.

“If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate,” Macklem said, offering some clarity on what it would take for a rate change.

Impacts on businesses, households

The central banker also noted that the Canadian economy is “showing some resilience,” though growth in business and household spending is being restrained by the uncertainty. And, while labour market conditions are weakening in trade-affected sectors, employment is holding up in other parts of the economy.

“CPI inflation was 1.9 per cent in June, up slightly from the previous month. Excluding taxes, inflation rose to 2.5 per cent in June, up from around 2 per cent in the second half of last year,” the Bank states in Wednesday’s release.

Asked whether at this point, there will be substantial and lasting impacts on this country’s economy, of the Canada-U.S. trade war having gone on as long as it has, Macklem said yes.

“Unfortunately, the sad reality is tariffs mean the economy is going to work less efficiently. It means there’s going to be less income, so there’s going to be less consumption,” he said.

“So yes, the economy will resume growing, but it’ll be on a permanently lower path and in that sense, yes, the tariffs have a permanent effect on the economy, unless they’re removed.”

Desjardins chief economist Jimmy Jean told CTV News on Wednesday that while the Canadian economy is not seeing a major impact yet on inflation, margins are thinner for many companies and if there are further tariffs, it’s more likely the costs will be passed along to consumers.

“I think we’re still in a holding pattern,” he said “You know, when will those tariff effects manifest, and how will it manifest? Over what duration? And what’s going to be the decisions that are going to be taken?”

“It’s going to be a theme throughout the rest of the year, unfortunately,” Jean added.

Economists were also closely watching what the United States Federal Reserve would decide in its Wednesday rate decision, amid Trump pushing for big cuts. Fed Chair Jerome Powell ultimately announced midday that he was leaving the short-term interest rate unchanged, at 4.3 per cent.

The Bank of Canada is scheduled to announce its next decision on the overnight rate target on September 17.