Newly disclosed records reveal that some members of the Bank of Canada were questioning last month whether the current benchmark interest rate is sufficiently low to sustain the Canadian economy amidst U.S. tariffs. The Bank of Canada recently unveiled the summary of discussions leading up to its decision on July 30 to maintain the policy rate at 2.75 percent.
The minutes indicate that the central bank’s governing council was focused on how U.S. tariffs and the global trade dynamics were impacting inflation and the broader Canadian economy. The decision by the central bank came shortly before U.S. President Donald Trump increased base tariffs on Canada to 35 percent, while exempting goods compliant with CUSMA.
Despite the prevailing uncertainties, monetary policymakers acknowledged some indications of economic resilience leading up to the rate decision. In particular, some members speculated whether the Bank of Canada had already provided adequate support to navigate the economy through the tariff challenges.
The central bank had previously reduced its policy rate seven times consecutively between June 2024 and March this year to stimulate the economy as inflation appeared to be stabilizing. Economists suggest that the effects of monetary policy decisions usually materialize a year or more after the adjustment, meaning that many of those rate cuts are now beginning to stimulate the economy.
In deliberations, the Bank of Canada’s governing council contemplated the implications of potential rate cuts, questioning whether lowering rates at present, only for the economy to rebound independently, might fuel inflation in the future. Some forecasters, like RBC, do not foresee any further interest rate cuts in their projections, while others within the central bank’s council believed that emerging economic slack might necessitate additional rate reductions, especially if weaknesses in the labor market became more apparent.
Regarding inflation, the governing council assessed three scenarios related to the U.S. tariff situation and concluded that none of them indicated a significant inflation surge. They also noted that the impact of tariffs on consumer prices had been relatively mild thus far, albeit only beginning to manifest in the data. The council recognized elevated risks to inflation due to underlying pressures and uncertainties surrounding the impacts of tariffs and trade disruptions on Canada’s economy.
The Bank of Canada is set to receive updated inflation data for July and August ahead of its upcoming interest rate decision on September 17.