Bank of Canada holds key rate, says economy weathered tariffs better than expected

Globe and Mail

30-07-2025

The Bank of Canada held its policy interest rate steady for the third consecutive time, noting that the Canadian economy has weathered U.S. tariffs better than expected while uncertainty remains pervasive.
As widely anticipated, the central bank's governing council voted to keep the benchmark interest rate at 2.75 per cent, where it has been since March.
Governor Tiff Macklem said there was a 'clear consensus' to hold the rate steady, but suggested the door remained open to additional rate cuts if needed.
'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,' he said, according to prepared press conference remarks.
Live updates on the Bank of Canada's July interest rate decision
The central bank is operating amid massive levels of uncertainty created by U.S. President Donald Trump's barrage of tariffs and attempt to rewrite the rules of global trade.
Indeed, the rate decision lands only two days ahead of the Aug. 1 deadline Mr. Trump set to strike some sort of trade deal with Canada. He has since thrown doubt on whether that deadline will be met.
As in April, the bank decided not to publish a central forecast in its quarterly Monetary Policy Report (MPR). Instead it outlined three potential scenarios for inflation and economic growth that depend on the trajectory of Mr. Trump's global trade war and Ottawa's ongoing negotiations with Washington.
The deals Mr. Trump struck with Japan, the European Union and other trade partners in recent weeks have 'reduced the risk of a severe and escalating global trade war,' Mr. Macklem said.
'Unfortunatly, the tariffs in those agreements also suggest the United States is not returning to open trade,' he added.
The 'current tariff scenario' outlined in the MPR, assumes existing U.S. levies on steel, aluminum and automobiles, as well as on goods that don't meet United States-Mexico-Canada (USMCA) rules of origin, remain in place – but don't get worse. In that scenario, the bank sees the Canadian economy contracting in the second quarter, but skirting an outright recession, while inflation remains around the bank's 2-per-cent target.
In the 'de-escalation scenario' where Prime Minister Mark Carney is able to secure some tariff relief, economic growth picks up and price pressure ease.
In the 'escalation' scenario, where Canada is hit by new sectoral tariffs and loses its USMCA tariff exemption, the economy enters a recession, with three quarters of negative growth, while inflation picks up.
'The lack of a conventional forecast does not impede our ability to take monetary policy decisions,' Mr. Macklem said.
'But the unusual degree of uncertainty does mean we have to put more weight on the risks, look over a shorter horizon than usual, and be ready to respond to new information.'
Trade wars tend to push up prices, but also slow economic activity, which puts downward pressure on inflation over time. Without a clear sense of where the economy is heading, the bank has been watching economic data closely to see which way inflation and other economic indicators break.
Annual consumer price index inflation came in at 1.9 per cent in June, although that number was artificially lowered by the cancellation of the consumer carbon price in the spring. Excluding taxes, inflation was 2.5 per cent while core inflation measures were around 3 per cent.
Mr. Macklem said that 'underlying' inflation appears to be around 2.5 per cent, although he did not sound particularly worried about it.
'Boiling it all down, there are reasons to think that the recent increase in underlying inflation will gradually unwind,' he said.
Meanwhile, the Canadian economy has been more resilient than many people expected earlier in the year when Mr. Trump started threatening the country. Some of this has to do with a surge in exports to the U.S. in the first quarter, as companies tried to get ahead of the levies.
Tariffs have also bitten less than feared, thanks to the carve-out for USMCA-compliant goods, which has allowed the vast majority of Canadian exports, outside the aluminum, steel and auto industries, to continue to trade tariff free.
Despite Mr. Trump's double-digit tariff threats, the Bank of Canada estimates that the current effective U.S. tariff rate on Canadian goods is around 5 per cent, up from effectively zero at the start of the year.
The portion of goods that can enter the U.S. tariff-free should also continue to rise as more companies become compliant with USMCA rules of origin. The bank estimates that 95 per cent of Canadian exports should be able to become compliant over the coming two years.
Still, the economic outlook remains concerning. The bank expects GDP to contract 1.5 per cent in the second quarter, as the surge in exports in the first quarter goes into reverse.
Unemployment remains elevated, particularly in the tariff-affected sectors, and Canadian consumers and businesses are holding back on spending, the bank said.
'A number of economic indicators suggest excess supply in the economy has increased since January,' Mr. Macklem said.
As the bank looks towards its next rate decision on Sept. 17, policy makers will be watching how much U.S. tariffs have reduced demand for Canadian goods and how this spills over into business investment, employment and household spending, Mr. Macklem said.
They're also watching how quickly tariffs and increased supply chain costs are passed on to consumers as higher prices, and how this influences inflation expectations, he said.
Mr. Macklem and Senior Deputy Governor Carolyn Rogers will hold a press conference at 10:30 a.m. ET.