After a series of rate cuts, the Bank of Canada opted to leave interest rates unchanged for a second consecutive time this morning, and Governor Tiff Macklem subtly communicated a bias toward further easing as officials wait to assess the impact that global trade tensions might have on growth and price pressures in the months ahead. As was widely expected, the overnight rate was left at 2.75 percent after seven consecutive cuts were delivered between June 2024 and March of this year, bringing the benchmark down from its peak at 5 percent.
In the official statement setting out the decision, policymakers acknowledged facing high uncertainty as the “US administration has continued to increase and decrease various tariffs,” while highlighting resilience in the economy and “some unexpected firmness” in recent inflation numbers, with the combined risk backdrop ultimately supporting a desire to preserve as much optionality as possible. The “Governing Council is proceeding carefully,” it said, “with particular attention to the risks and uncertainties facing the Canadian economy. These include: the extent to which higher US tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve”.
In comments prepared ahead of the post-decision press conference, Governor Macklem said “The trade conflict initiated by the United States remains the biggest headwind facing the Canadian economy”. Growth in the first quarter of the year borrowed “strength from the future,” he warned, potentially setting the stage for weakness ahead, with households and businesses “likely to remain cautious, suggesting domestic spending will remain subdued”. Perhaps most critically, Macklem said “On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued US tariffs and uncertainty, and cost pressures on inflation are contained”.
As we go to print, the Canadian dollar is almost unchanged relative to pre-release levels. A change in tone is possible as the Governor and Deputy Governor Rogers answer reporter questions, but the dovish bias expressed thus far should help to keep rate differentials—and the loonie—contained for now.
Our base case expectation is for further weakness in the economy to arrive over the coming months, which should—along with a renewed moderation in inflation rates—give policymakers room to deliver more easing.
However, a lot of water will pass under the bridge between now and the July 30 decision. Two retail sales reports, two jobs numbers, two inflation updates, a set of quarterly consumer and business surveys, and a number of tariff deadlines are set to land before officials meet again. The July decision will also coincide with the release of the Bank’s quarterly Monetary Policy Report, which will offer policymakers an opportunity to more carefully calibrate household and market expectations for the easing trajectory ahead. If the economy remains surprisingly resilient and price pressures continue to build, rate cuts could be pushed further into the future.