The Canada Bank maintained its interest rate at 2.75 percent per third consecutive time on Wednesday, but left the door open for greater relief of the rate if inflation is contained.
“We will continue to evaluate the moment and strength of the descending pressures on the inflation of a weakest economy and the ascending pressures on the inflation of higher costs related to the rates and the reconfiguration of the trade,” said the governor of the Bank of Canada, Tiff Macklem, in Ottawa.
“If a weakened economy exerts a lower pressure on inflation and the pressures of the rise prices of commercial interruptions are contained, it may be the need for a reduction in the interest rate of the policy.”
Macklem said there were three reasons that led to the decision, including the continuous uncertainty of the United States commercial policy, a more resistant Canadian economy and evidence of underlying inflation pressures.
“The bank seems to be a little more comfortable with the notion that the Canadian economy will need support for more interest rate cuts in the future,” said Andrew Grantham and Katherine Judge, economists from the Canadian Imperial Trade Bank, in a note.
“However, it is not yet there and the next data will remain more important than today’s slight change in language to determine if that support comes as soon as the September meeting as we are currently forecast.”
The Central Bank also chose not to publish a prognosis in its monetary policy report, instead of presenting three scenarios, with the first one that covers current rates in its place to July 27, the second represents a rediscovery in rates and a third that shows an escalation in the United States rates.
“As in April, we have decided not to present a conventional forecast for growth and inflation,” Macklem said. “I want to underline that the lack of conventional prognosis does not prevent our ability to make monetary policy decisions.”
In the current tariff scenario, sectoral tariffs remain in place in cars, steel and aluminum and rates of goods that do not comply with the Canadian-State-State Agreement remain in force. (The bank estimates that 100 percent of energy and 95 percent of all other goods comply with Cusma and, therefore, are not subject to rates). The scenario takes into account the recent agreements between the United States and the European Union and the retaliation rates of Canada and Canada also remain established for $ 60 billion in American goods.
Under this scenario, the Central Bank expects growth to contract in the second quarter, before returning to one percent in the third quarter, as exports are stabilized and home spending is strengthened. The growth then collects in 2026 and reaches 1.8 percent in 2027.
This contrasts with the previous forecasts of economists who predicted a recession this year, with a negative growth in the second and third quarter. Exports decreased sharply during the second quarter, after significant traction in the first quarter, but Macklem said this swing will moderate for the third quarter.
“When you get to the third quarter, we do not expect a great recovery in exports, but after having decreased, they should not subtract again again [from growth] That’s a lot, ”said Macklem.
“When you stop exports … you are seeing that consumption continues to grow, it is growing modestly, it is certainly being restricted by the uncertainty caused by tariffs, but it is growing.”
On the climbing scenario, Canada and Mexico lose their exemptions from Cusma and are subject to a reference rate of 10 percent. The United States also imposes a 50 percent rate on copper and increases its weighted average rate in countries from nine percentage points to 23 percentage points. Canada intensifies its retaliation rates on US assets and China-United States trade wars worsens.
In this scenario, the GDP hired for the rest of 2025, with a slowly resumed growth in the first half of 2026. The inflation of the headlines increases to a little more than 2.5 percent in the third quarter of 2026.
In the decalming scenario, sectoral tariffs are reduced by half and the rate of the Canadian goods rate that do not meet Cusma falls from 25 % to 10 percent. Canada also eliminates its retaliation rates.
In this scenario, GDP grows around two percent for the second half of 2025, and averages 1.7 percent until the end of 2027. Inflation remains below the two percent target until the end of 2026.
The Central Bank said that the underlying inflation is currently 2.5 percent, above the main number of 1.9 percent, due to the impact of carbon tax elimination. The participation of the IPC components that increase by more than three percent in a year after year has increased and is above its historical average, while central inflation measures have been around three percent since April.
“Inflation in goods prices, excluding energy, has increased to 2.2 percent from approximately zero in the second half of 2024, above its historical average,” the report said. “This increase is mainly attributed to the passage of the past increases in import costs in a wide range of products, from motor vehicles and furniture to clothing and coffee.”
The factors that led to this increase include the depreciation of the Canadian dollar against the Greenback at the end of 2024, the past growth in shipping costs and past increases in agricultural prices.
Looking towards the future, the governor said that the Central Bank will remain focused on how trade interruption affects underlying inflation.
“As I mentioned, some of the factors that may be causing that increase, should relax,” Macklem said. “We are starting to see the effects of tariffs and the countermeasures in the inflation of the CPI, you can see a little in the food, there are probably more to come there, so that will put an ascending pressure, so we are going to measure those pressures up and down.”
According to the current scenario, the Central Bank also hopes that residential investment will be strengthened during the second half of this year, after it decreased by 11 percent in the first quarter of 2025. It also expects the slow population and weak business investment to continue to weigh on the potential growth of production during the second half of this year.
The Central Bank said that the unemployment rate remains high at 6.9 percent, but that so far employment losses have been limited to sectors that depend largely on US trade.
• Email: jgowling@postmedia.com
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