This move reflects ongoing concerns over uncertainty which continues to dominate the Bank’s outlook. The Bank’s announcement deviated from its usual practice of issuing a base-case economic forecast. Instead, the bank offered three potential scenarios due to the unpredictability of U.S. trade policies under President Trump.
Governor Tiff Macklem highlighted the Bank could consider lowering interest rates if the Canadian economy weakens further. However, Macklem also noted the resilience of the Canadian economy and persistent underlying inflation pressures as key factors in maintaining the current rate.
Economists had widely expected the BoC to keep rates unchanged, but the language used in the announcement opened up discussions on future rate cuts. While there is some expectation that the Bank could cut rates at its September 17 meeting, views remain divided. National Bank of Canada economists pointed out the BoC’s explicit mention of conditions that could justify a rate cut challenged the growing belief that the Bank’s easing cycle had come to an end.
The BoC’s Monetary Policy Report refrained from providing a single economic forecast. Instead, it presented three scenarios: one based on current tariff conditions, and two others exploring potential escalations or de-escalations of trade tensions. Governor Macklem noted that the current tariff situation still falls well outside historical norms, despite the U.S. reducing the threat of higher tariffs. Regardless of the scenario, Macklem acknowledged that the trade dispute would lead to less economic efficiency, ultimately lowering income levels and consumption.
The Bank also acknowledged persistently high core inflation. However, it expects inflation to gradually ease, supported by a stronger Canadian dollar, falling labour costs, and an economy operating below its full potential. The BoC forecasted a contraction in economic activity during the second quarter of the year, followed by modest growth for the rest of 2025.
Some analysts, such as BMO’s chief economist Douglas Porter, believe the case for a rate cut in September would require two favourable Consumer Price Index (CPI) reports leading up to the meeting. On the other hand, economists at Desjardins Group see multiple rate cuts ahead, particularly in two of the Bank’s three scenarios. They also noted that lower-than-expected tariff revenues could push inflation below forecasts, potentially paving the way for rate cuts.
As it stands, the Bank of Canada faces a delicate balancing act, closely monitoring economic data and U.S. trade developments to decide whether further rate cuts are warranted.
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