BOC holds rates unchanged as Trump's August deadline approaches

The Bank of Canada kept its key interest rate unchanged at 2.75% on Wednesday, citing the resilience of the Canadian economy despite the ongoing global trade war sparked by the United States.

Governor Tiff Macklem stated in pre-prepared remarks that the board’s decision was based on a “clear consensus.”

He explained that the Canadian economy has not experienced a sharp downturn despite significant trade uncertainty, and that core inflation remains relatively stable, even in the face of continued US tariffs.

This decision follows the bank’s choice to keep rates steady in both April and June, amid uncertainty stemming from global tariffs.

The move was in line with economists’ expectations ahead of the announcement.

Macklem noted that recent trade deals signed by the US with major global players such as Japan and the European Union have eased fears of a severe and escalating global trade war, and that the impact thus far has been less severe than initially feared.

Free Trade Unlikely to Return: Macklem

Although US President Donald Trump has recently signed new trade agreements, Macklem noted that these deals still include certain tariff levels.

He added that the nature of these agreements indicates the US is not reverting to a system of open free trade.

While some sectors have been heavily impacted by these tariffs, Macklem emphasized that challenges remain.

He said the Bank of Canada is closely monitoring how these tariffs affect business activity and demand for Canadian exports, and whether the higher costs from tariffs will be passed on to consumers.

The Bank of Canada cuts interest rates when it wants to stimulate the economy, but keeps borrowing costs elevated when inflation acceleration is a concern.

The central bank released its monetary policy report alongside Wednesday’s rate decision, but once again refrained from providing a single central forecast for economic performance, citing continued uncertainty.

Instead, the bank presented a baseline scenario based on current tariff levels, along with two alternative scenarios exploring the possibility of either easing or further escalation in tariffs. All three scenarios assume a continued presence of tariffs at some level.

While it remains difficult to determine the exact level of tariffs due to various exemptions and overlapping duties, the bank estimates that the effective tariff rate imposed by the US on Canada currently stands at around 7 to 8% — an increase of five percentage points since the start of the year.

Policymakers at the Bank of Canada assume that the vast majority of Canadian goods will eventually receive tariff exemptions in the coming years, thanks to compliance with the Canada–United States–Mexico Agreement, as companies accelerate efforts to obtain certification.

Under the baseline scenario, the Bank of Canada expects the economy to recover during the remainder of this year, following a 1.5% decline in seasonally adjusted annual real GDP in the previous quarter.