Bank of Canada Keeps Key Rate at 2.75% Amid Trade Uncertainty

Signs of resilience in the Canadian economy were enough for the Bank of Canada to keep its benchmark interest rate unchanged on Wednesday, while ongoing U.S. trade uncertainty remained a central consideration for policymakers.

The central bank’s policy rate remains at 2.75% after the third consecutive decision to hold steady.

Governor Tiff Macklem said the governing council reached a “clear consensus” in prepared remarks announcing the decision.

Bank will consider a rate cut if growth slows sharply

The Bank of Canada raises or lowers its policy rate to balance two objectives: stimulating economic growth when activity is weak, and containing rising inflation when price pressures mount. For now, the bank is keeping borrowing costs elevated because underlying inflation remains a concern.

Macklem described the economy as showing “some resilience” but acknowledged that conditions could change. He signaled that a reduction in the policy interest rate could be considered if economic growth weakens significantly and trade-related price pressures do not outweigh the downward influence on inflation.

“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,” Macklem said, underlining that the bank is prepared to adjust policy if economic data warrant it.

CIBC senior economist Andrew Grantham noted in a client note that the central bank appears increasingly comfortable with the possibility of future rate cuts to support the economy. Grantham suggested Macklem’s remarks left open the chance of cuts as soon as September, while emphasizing that upcoming data releases will be decisive for the bank’s next moves.

Headline inflation ticked up to 1.9% in June, but the Bank of Canada estimates underlying inflation — stripping out volatile components and temporary tax effects — sits nearer 2.5%. That distinction helps explain why policymakers remain cautious about cutting rates too soon.

The labour market presents a mixed picture: some tariff-exposed industries, such as manufacturing, are showing signs of weakness, yet other sectors continue to add jobs. The bank will monitor how tariffs influence business activity, demand for Canadian exports, and whether increased import costs are passed on to consumers.

Odds of severe global trade war have decreased, says Macklem

Macklem noted that effective U.S. tariff rates are currently “less than were threatened,” though still elevated compared with recent historical experience. He said the likelihood of a “severe and escalating” global trade war has declined in recent months, even as trade frictions persist.

Recent U.S. trade deals with partners such as Japan and the European Union include tariff elements that suggest a continued departure from fully open trade. Macklem argued these agreements indicate the United States is not reverting to pre-tariff-era openness.

Accompanying Wednesday’s rate decision, the Bank of Canada released a monetary policy report that did not present a single central forecast for the economy because of the high degree of uncertainty around trade. Instead, policymakers outlined three scenarios: one assuming current tariff levels persist, one assuming a de-escalation of tariffs, and a third reflecting a further escalation. Each scenario assumes some tariffs remain in place.

On its assessment, the effective U.S. tariff rate on Canada is roughly 7% to 8% today — about five percentage points higher than at the start of the year. Because exemptions and overlapping duties complicate precise measurement, the bank models a range of outcomes rather than a single projection.

The Bank of Canada also assumes most Canadian goods will qualify for exemptions under the Canada-United States-Mexico Agreement (CUSMA) in the coming years as businesses take steps to meet certification requirements.

Under the status quo scenario, the bank expects the economy to rebound over the remainder of the year after an estimated annualized real GDP decline of 1.5% in the previous quarter. In this scenario, real GDP growth in 2025 and 2026 is projected to be about 0.5 percentage points lower than the bank’s pre-trade-war projections from January. Inflation under this baseline would remain roughly around 2% through the end of 2027, with upward and downward forces largely offsetting each other.

In a de-escalation scenario — which halves U.S. tariffs on Canada and assumes Canada drops counter-tariffs — the upward pressure on prices eases and growth rebounds more quickly. By contrast, an escalation scenario, in which the United States applies a broad 10% tariff on goods from Canada and Mexico and threatens much higher duties on specific commodities, would push inflation higher and could plunge the Canadian economy into recession through 2025.

The Bank of Canada’s analysis does not explicitly model every potential outcome, including threats of very large duties announced in the political arena. Policymakers say they will continue monitoring developments closely and adjust policy as needed in response to changing economic indicators and trade developments.

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