After a series of rate cuts, the Bank of Canada decided to leave interest rates unchanged for a third consecutive time this morning, but signalled a willingness to cut rates again if inflation stabilises and the economy continues its underperformance.
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 noted that the Trump administration’s policy changes are “disrupting trade,” but the “economy is showing some resilience so far”. “After robust growth in the first quarter of 2025 due to a pull-forward in exports to get ahead of tariffs,” gross domestic product “likely” fell by 1.5 percent in the second quarter as business and household spending was “restrained by uncertainty”. “Labour market conditions have weakened in sectors affected by trade, but employment has held up in other parts of the economy,” and the unemployment rate has moved up to 6.9 percent since the beginning of the year.
Most dovishly, officials said “A number of economic indicators suggest excess supply in the economy has increased since January”. If a “weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate”.
Updated scenarios in the Monetary Policy Report showed the Bank’s economists outlining three possibilities for how growth and inflation might evolve if existing trade policies were to remain in place, or change in a significant way. Under the first, in which tariffs stay at current levels, the Bank expects growth to end the year at around 1 percent and climb to 2 percent in 2026 as trade uncertainties are resolved, business investment ramps up, and household spending gradually recovers. In the second, tariffs are ultimately lowered and growth improves while inflation falls. The third, most negative scenario, shows the economy slowing and prices ratcheting higher as tariff rates are raised further.
In comments released ahead of the post-decision press conference, Governor Tiff Macklem said “I want to underline that the lack of a conventional forecast does not impede our ability to take monetary policy decisions. But the unusual degree of uncertainty does mean we have to put more weight on the risks, look over a shorter horizon than usual, and be ready to respond to new information”.
This combination—a far-from-optimistic outlook on the economy (even under status quo conditions), paired with the Bank’s stated readiness to resume easing—should keep the Canadian dollar under pressure, potentially putting it on course to challenge the 1.39 mark before September, especially if the greenback resumes its appreciation. There’s light at the end of the tunnel for the Canadian economy and the loonie, but it remains far off in the distance.