Bank of Canada Keeps Interest Rates at 2.75% Amid Trade Concerns and Economic Slowdown
The Bank of Canada decided to maintain its target for the overnight lending rate at 2.75%, marking the third consecutive meeting where rates have been held steady. This decision comes amid significant economic uncertainty, particularly concerning U.S. trade policy, which continues to be unpredictable. The looming August 1 deadline for trade negotiations between Canada and the U.S. has added to this uncertainty, and new trade actions are still being considered. As a result, the Bank is closely monitoring the economic situation, especially in light of the effects on Canada's economic activity.
In its latest economic analysis, the Bank estimated that Canada’s second-quarter GDP contracted by 1.5%, largely due to a decline in exports to the U.S. following the implementation of tariffs. Growth in household spending has also been sluggish, further dampened by ongoing economic uncertainty and weakened labor market conditions, especially in sectors affected by trade restrictions. These factors have contributed to a more cautious outlook for Canada’s economic growth in the near term.
Inflation also remains a concern, with the Consumer Price Index (CPI) reaching 1.9% in June. The rise in shelter costs, particularly rent, has been the primary driver of inflation. However, underlying inflation is estimated to be around 2.5%, which remains within the Bank’s target range of 1-3%. The Bank continues to monitor inflation closely, balancing the downward pressures from slower economic activity with the upward pressures from higher tariffs on goods, particularly imports from the U.S.
Looking ahead, the Bank has outlined three potential scenarios for Canada’s economic future based on trade policies. If current tariffs remain in place, GDP growth is expected to pick up modestly to 1% in the second half of 2025 and rise further to 2% by 2027. If tariffs are reduced, GDP growth could rebound more quickly, with less upward pressure on inflation. However, if tariffs escalate, Canada’s GDP is likely to continue declining, further increasing inflationary pressures. Given these uncertainties, the Bank of Canada has emphasized its focus on price stability, particularly through monitoring inflation expectations and the impact of higher tariffs on Canadian exports, business investment, and household spending. The next interest rate announcement is scheduled for mid-September 2025.