Bank of Canada Expected to Hold Rates Steady Amid Trade War Concerns

The Bank of Canada is likely to keep interest rates at 2.75% for the third time, reflecting a softer-than-expected impact of the trade war with the US on the Canadian economy. Inflationary pressures and the need for monetary stimulus have tempered the central bank's stance. The BoC will also wait for the outcome of trade negotiations with the US before changing its policy. Money markets are betting on a 7% chance of a rate cut at the upcoming announcement.

The Bank of Canada is widely expected to keep its policy interest rate at 2.75% for the third consecutive meeting, reflecting a softer-than-expected impact of the ongoing trade war with the United States on the Canadian economy. This decision comes amidst ongoing inflationary pressures and the need for monetary stimulus, which have tempered the central bank's stance. The Bank of Canada (BoC) will likely wait for the outcome of trade negotiations with the United States before making any significant changes to its policy. Money markets are currently betting on a 7% chance of a rate cut at the upcoming announcement.

The BoC's decision to pause for a third straight time is driven by a combination of factors. Sticky core inflation and uncertainty over the net effects of U.S. trade conflicts on economic growth and costs have led the central bank to adopt a cautious approach. Governor Tiff Macklem's remarks in June suggested that the Governing Council would continue to "proceed carefully" and remain "less forward-looking than usual," indicating a wait-and-see attitude until the trade dynamics become clearer.

Despite the trade war, the Canadian economy has shown resilience, with the unemployment rate dipping to 6.9% in June and the economy adding 83,100 jobs, though most of the gains were in part-time jobs. The Bank of Canada officials have been monitoring both the downward pressure on inflation from a weaker economy and the upward pressure from higher costs. While the yearly change in the consumer price index (CPI) is below the central bank's 2% target, measures of underlying price pressures are averaging above 3%, and consumer expectations of inflation remain elevated.

The recent Canadian inflation data, released on July 15, showed the year-on-year increase in the total CPI edging up to 1.9% in June after being unchanged at 1.7% in May. However, the core inflation measures remain stubbornly high, with the CPI trim at 3.0% in June and May, and the CPI median picking up to 3.1% in June from 3.0% in May.

Economists and markets expect the BoC to hold rates steady as they await more clarity on the trade negotiations. The Bank of Montreal's chief economist, Douglas Porter, noted that the economy has managed to navigate the period of intense uncertainty, with the tariff impact being concentrated in a few sectors. However, the BoC will likely continue to monitor the economic data closely to assess the persistence of elevated core inflation and the potential impact of rising mortgage costs on future consumption.

The current trade negotiations between Canada and the United States are still in progress, with Prime Minister Mark Carney aiming to reach a deal by August 1. The BoC will need to consider the outcome of these negotiations before making any further adjustments to its monetary policy. The neutral range of the overnight rate is estimated to be between 2% and 4%, indicating that the BoC has room to maneuver if necessary.

References:
[1] https://macenews.com/preview-bank-of-canada-set-to-pause-for-3rd-straight-meeting-amid-sticky-core-inflation-uncertainty-over-us-trade-row-impact-on-growth-costs/
[2] https://www.bloomberg.com/news/articles/2025-07-29/bank-of-canada-rate-decision-boc-to-hold-as-trade-clouds-won-t-go-away