July 2025 Monetary Policy Update
The Bank of Canada announced today that it will maintain its overnight rate at 2.75%, marking the third consecutive hold since its rate cut in March. The Bank Rate remains at 3.00%, and the deposit rate at 2.70%.
This decision reflects a cautious, data-dependent approach as the Bank continues to assess evolving economic conditions, both domestically and globally. Heightened trade uncertainty—particularly related to shifting U.S. tariffs—remains a key risk factor influencing the Bank’s outlook.
Economic Snapshot: Canada and Beyond
While U.S. trade policy remains unpredictable, recent global economic data shows reasonable resilience. In Canada, the economy contracted in the second quarter of 2025—largely due to a temporary surge in exports earlier in the year, ahead of anticipated tariffs. As expected, this was followed by a sharp drop in export activity. Despite this, the Bank projects a modest rebound in GDP growth (around 1%) in the second half of the year.
Business and consumer spending have slowed amid ongoing uncertainty, but some areas of the labour market remain stable. Canada’s unemployment rate has edged up to 6.9%, and wage growth has continued to moderate.
Inflation Outlook
Consumer Price Index (CPI) inflation rose to 1.9% in June, with underlying inflation hovering around 2.5%. Shelter costs remain the main contributor to inflation, although they are gradually easing. Inflation pressures from tariffs and supply chain adjustments could persist, especially as businesses adapt by finding new suppliers and markets.
Looking Ahead
The Bank’s current forecast scenario assumes tariffs stay at current levels, with inflation stabilizing near 2% and economic slack gradually reducing through 2026–2027. However, if trade tensions escalate, Canada could see further economic contraction. Conversely, a de-escalation would likely support a faster recovery.
In summary, with inflation still elevated, the global trade environment uncertain, and the Canadian economy showing some resilience, the Bank of Canada is holding firm on rates for now. Future interest rate decisions will depend on the path of inflation, trade developments, and broader economic trends.
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