The Bank of Canada is keeping its policy interest rate steady at 2.75 per cent, saying global trade uncertainty and underlying inflation pressures continue to shape the economic outlook.
Governor Tiff Macklem said that the central bank’s Governing Council weighed three key considerations when making its decision: the unpredictability of international trade policy, modest signs of economic resilience in Canada, and elevated core inflation indicators.
Rather than providing a traditional economic forecast, the Bank published three possible scenarios in its July Monetary Policy Report. One is based on the current trade environment, another assumes an escalation of trade actions, and a third models the outcome if such measures ease. Macklem explained that this scenario-based approach reflects the uncertainty surrounding international trade developments, particularly those involving Canada’s largest trading partner.
In the Bank’s base-case scenario, Canadian GDP declined in the second quarter, following a pull-forward in exports during the first quarter as firms adjusted to anticipated trade changes. Modest growth is projected to resume later this year, with economic activity expected to increase by roughly one per cent in the second half. While growth is forecast to strengthen in 2026 and 2027, the overall level of output is expected to remain permanently lower due to trade-related adjustments.
Headline inflation stood at 1.9 per cent in June. When tax changes are excluded, underlying inflation was estimated at approximately 2.5 per cent. The rise was attributed primarily to higher non-energy goods prices, though shelter costs continued to be the largest single contributor to overall inflation.
Macklem said several factors could help relieve upward pressure on prices, including a stronger Canadian dollar, slower wage growth, and evidence of slack in the economy. However, he also noted that the reconfiguration of global supply chains and sourcing arrangements is introducing new cost pressures that may gradually pass through to consumers.
The central bank signalled that a future rate cut is possible if the Canadian economy weakens further and cost pressures from global trade developments remain contained.
While some sectors have experienced a downturn, Macklem noted that broader indicators suggest the economy continues to grow. Employment losses have been concentrated in trade-exposed industries, while jobs in other areas have continued to increase. The national unemployment rate rose to 6.9 percent in June.
In addressing public concerns about inflation, Macklem emphasized that the Bank remains focused on where inflation is heading. He said that if inflation appears likely to move back toward the 2 per cent target, current levels around 2.5 per cent may be tolerable. However, if inflationary pressures build further, the Bank would take appropriate action.
The Governor also reiterated the independence of the institution in response to political commentary, including remarks from Ontario Premier Doug Ford, who called for an immediate rate cut. Macklem maintained that decisions are made based on the Bank’s policy mandate and not political considerations.
He also reflected on the shifting global trade environment, describing it as increasingly complex and emphasizing the importance of Canada diversifying its trading relationships. He noted that while the country has long depended on a single export market, there are opportunities to broaden access and strengthen internal trade by reducing interprovincial barriers.
Looking ahead, the Bank said it will continue to monitor four key areas: how changing global trade conditions affect Canadian exports; how those effects spread to domestic investment and household spending; how quickly new cost pressures feed into consumer prices; and how public expectations for inflation evolve.