The Bank of Canada has decided to maintain its target for the overnight rate at 2.75%, keeping the Bank Rate at 3% and the deposit rate at 2.70%. This decision comes amid ongoing uncertainty surrounding US trade policy, with negotiations continuing and the threat of new sectoral tariffs persisting.
According to the Bank, “While some elements of US trade policy have started to become more concrete in recent weeks, trade negotiations are fluid, threats of new sectoral tariffs continue, and US trade actions remain unpredictable. Against this backdrop, the July Monetary Policy Report (MPR) does not present conventional base case projections for GDP growth and inflation in Canada and globally. Instead, it presents a current tariff scenario based on tariffs in place or agreed as of July 27, and two alternative scenarios—one with an escalation and another with a de-escalation of tariffs.”
Despite volatility caused by US tariffs, global economic activity has shown some resilience. In the United States, growth slowed in early 2025 but labor market conditions remained steady. The US consumer price index rose in June as some tariff effects began reaching consumers. The euro area saw modest economic expansion during the first half of this year. China offset its decline in exports to the United States by increasing sales elsewhere globally.
Financial markets responded with higher equity prices and narrower corporate credit spreads while longer-term government bond yields increased. The Canadian dollar strengthened against a generally weaker US dollar.
The Bank’s report outlines that under its current tariff scenario, global economic growth is expected to slow slightly to around 2.5% by late 2025 before returning near 3% over 2026–2027.
Domestically, Canadian GDP grew strongly in early 2025 as exporters rushed shipments ahead of anticipated tariffs but likely contracted by about 1.5% in the second quarter due to decreased export activity and reduced US demand for Canadian goods. “In Canada, US tariffs are disrupting trade but overall, the economy is showing some resilience so far,” according to the release.
Business investment and household spending have been held back by uncertainty related to trade issues. Labor market weakness has been observed mainly in sectors affected by these changes; however, employment levels remain stable elsewhere within Canada’s economy. Since January, unemployment gradually increased—reaching 6.9% last month—and wage growth continued easing.
Under present conditions described by policymakers: “In the current tariff scenario, after contracting in the second quarter, GDP growth picks up to about 1% in the second half of this year as exports stabilize and household spending increases gradually.” The outlook varies across scenarios: faster recovery if tariffs decrease or further contraction if they rise.
Inflation stood at 1.9% for June; when excluding taxes it reached 2.5%, reflecting mostly higher non-energy goods prices while shelter cost inflation remains elevated yet continues slowing down overall inflation rates somewhat.
“In the current tariff scenario,” states Bank officials,” total inflation stays close to 2% over the scenario horizon as upward and downward pressures on inflation roughly offset.” They note risks persist: lower tariffs could ease pressure on prices while higher ones may increase them—furthermore businesses face added costs finding new suppliers which might raise consumer prices too.
“With still high uncertainty,” says Governing Council,”the Canadian economy showing some resilience,and ongoing pressures on underlying inflation,Governing Council decided to hold policy interest rate unchanged.We will continue assessing timing/strength both downward/upward pressures on inflation…If weakening economy puts further downward pressure on inflation…and upward price pressures from disruptions are contained…there may be need for reduction…”
Officials emphasized careful monitoring going forward: “Governing Council is proceeding carefully…These include extent higher US tariffs reduce demand…how much spills into business investment/employment/household spending…how quickly costs pass onto consumers; how expectations evolve.”
The next scheduled announcement regarding interest rates is set for September 17,2025.
