Bank of Canada Holds Policy Rate at 2.75 Percent, Cites ‘Resilience’ of Economy

The Bank of Canada is maintaining its key interest rate at 2.75 percent, saying global tariff uncertainty remains high but Canada’s economy is showing “some resilience so far.”

“At this rate decision, there was clear consensus to hold our policy rate unchanged,” Bank of Canada Governor Tiff Macklem told reporters on July 30.

Macklem said the Bank will assess future interest rate changes based on “the risks and uncertainties” for Canada’s economy, such as how much U.S. tariffs reduce demand for Canadian exports, and how that impacts business investment, household spending, employment, and inflation.

“If a weakening economy puts further downward pressure on inflation, and the upward price pressure from the trade disruptions is contained, there may be a need for a reduction in the policy interest rate,” Macklem said.

Macklem said while the global consequences of tariffs have been less harmful than anticipated, due in part to trade agreements the U.S. has made with various countries, “the tariffs in those agreements also suggest the United States is not returning to global trade.”

The United States has placed a series of tariffs on Canada, including 50 percent tariffs on steel and aluminum, 25 percent tariffs on vehicles and auto parts, and 10 percent tariffs on oil and potash. The U.S. has also put a general 25 percent tariff on Canadian goods not covered under the United States-Mexico-Canada Agreement, and U.S. President Donald Trump has said those tariffs could rise to 35 percent on Aug. 1.

The Bank of Canada said Canada saw “robust growth” in the first quarter of 2025 due to corporations “rushing to get ahead of tariffs” and stacking inventory. But the Bank said the country’s GDP contracted by about 1.5 percent in the second quarter as exports to the United States declined.

Macklem said Canadian businesses and households have been holding back on growing their spending, as consumer and business sentiment is low. He said sectors of Canada’s economy directly impacted by tariffs are seeing “profound impacts,” and there have been job losses in those sectors that have been partially offset by growth in other ones.

While the Consumer Price Index (CPI) has been pulled down to less than 2 percent by the elimination of the federal carbon tax back in March, Macklem said a “range of indicators” show inflation has since increased to 2.5 percent. The inflation increase is due to goods other than energy, with housing remaining the largest contributor to higher CPI numbers.

The Bank of Canada also said the global economy has been “reasonably resilient” in the face of U.S. tariffs. The United States has seen moderate economic growth and a sustained labour market, the European Union has had modest growth, while China has seen a decline in exports to the United States offset by increases in exports to other countries.

The Bank also noted that Canada’s exchange rate has “appreciated against a broadly weaker U.S. dollar,” with the currency rising from around 69 cents against the U.S. dollar back in January to 73 cents in July.

Monetary Policy Report

The Bank of Canada chose not to present a “conventional” economic forecast in its Monetary Policy Report, saying U.S. tariffs are still too unpredictable to give a single forecast for the Canadian economy. 

The report presents a “current tariff scenario,” as well as two scenarios where U.S. tariffs are removed. In the current scenario, where U.S. tariffs and trade agreements are permanent and the United States puts an average tariff rate of 12 percent on all countries, Canada’s GDP is expected to grow at 1 percent in the second half of 2025.

The current scenario sees exports stabilize at a “lower level of activity” and household spending strengthens, allowing GDP growth to reach 1.8 percent by 2027. Inflation remains at around 2 percent during this time, as upward pressure on inflation from tariffs is offset by a stronger Canadian dollar, the easing of shelter prices inflation, and the removal of the consumer carbon tax.

“Boiling it all down, there are reasons to think that the recent increase in underlying inflation will gradually unwind,” Macklem said on the scenario. However, he noted that businesses are reporting difficulties in finding new suppliers and developing new markets, which could “add upward pressure” to prices.

In a scenario where the United States “de-escalates” by lowering its tariffs on most countries to an average of 10 percent worldwide, Canada’s economic growth recovers in the second half of 2025 and is roughly 0.5 percent higher by the end of the year than in the current scenario.

Inflation would also stay lower than 2 percent until late 2026 and then average 2 percent in 2027, the growth of exports would pick up into late 2026, consumption and residential demand would be stronger, and business investment would see a boost.

In the “escalation” scenario that sees the United States increase tariffs to an average rate of 28 percent on all countries, with Canada and China doubling the value of U.S. goods subject to tariffs, Canada would see a recession lasting for three quarters and growth slowly recover in 2026.

Canadian imports would fall until the first quarter of 2026 in such a scenario. Some Canadian exporters would be forced to reduce hours and lay off workers, household purchasing power would weaken due to deteriorating market conditions, and inflation would rise to above 2.5 percent by the third quarter of 2026 before falling back to 2 percent in 2027.

In its previous Monetary Policy Report released in April, the Bank said a scenario where the United States has 25 percent tariffs on goods from all countries, 12 percent tariffs on Canada, and 25 percent tariffs on motor vehicles and parts would see the United States enter a recession in 2025 and inflation in the country hit 3 percent.

In that scenario, the Bank forecasted Canada would also see a recession in the middle of 2025, unemployment rise, incomes fall, and inflation rise to 3 percent in early 2026 and return to 2 percent by 2027.

Matthew Horwood is a reporter based in Ottawa.