maintaining a neutral position

As was widely expected, the Bank of Canada held its trend-setting policy interest rate at 2.75% today. This was the third consecutive policy rate announcement in which the Bank elected to maintain the rate after seven consecutive cuts beginning in June of last year.

The Bank noted that while US tariffs are disrupting trade, both the Canadian and global economies have been somewhat resilient. Uncertainty around US trade policy has subsided of late, but in the Bank’s words “US trade actions remain unpredictable”. The Bank projects that GDP in Canada likely declined by about 1.5% in Q2 after strong growth in Q1 that was driven by a pull-forward of US exports ahead of tariff implementation.

Inflation remains near target at 1.9%, however, core measures have increased over the past few months and the Bank estimates that underlying inflation is currently around 2.5%. In its release the Bank noted that under the current tariff scenario, (they also provide scenarios for tariff escalation and deescalation) “total inflation stays close to 2% over the scenario horizon as the upward and downward pressures on inflation roughly offset”.

While the unemployment rate in Canada has been rising through most of 2025, it fell to 6.9% in June with a strong month of hiring. The Bank noted in its July Monetary Policy Report that while employment in sectors with significant reliance on exports to the US has fallen sharply, employment continues to grow in industries that are less sensitive to trade. It also observed that “a number of economic indicators suggest excess supply in the economy has increased since January”.

After the Bank’s June interest rate announcement we suggested that an interest rate cut in July was likely due to ongoing weakness in the labour market and stable inflation. With the rise in core measures of inflation, stronger-than-expected recent job growth, and uncertainty around the ongoing Canada-US trade negotiations, the Bank had plenty of reasons to hold its rate today and wait for further data in the coming weeks. The Bank commented in its release today that “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”. Our expectation is that the labour market will continue to weaken in the coming months, increasing the likelihood of another interest rate reduction. The next interest rate announcement is on September 17th.