The Bank of Canada decided to maintain its interest rate at 2.75 percent on Wednesday, highlighting the economy’s resilience amidst the ongoing global trade tensions led by the U.S. Governor Tiff Macklem mentioned in a statement that the council reached this decision with a strong consensus.
Despite significant trade uncertainties, the Canadian economy has not seen a sharp decline in response to U.S. tariffs, with underlying inflation showing persistence. This decision follows the previous choices to keep rates steady in April and June, which were also influenced by global trade uncertainties.
Market analysts had anticipated this decision leading up to the announcement. The Bank of Canada typically reduces its policy rate to stimulate economic growth and keeps borrowing costs high when concerned about potential inflation spikes.
Macklem noted progress in recent trade agreements between the U.S. and other nations, reducing the risk of an all-out global trade war. However, he emphasized that the option to lower rates in the future remains open if needed.
Macklem expressed skepticism about a return to open trade, citing ongoing tariffs in trade deals with Japan and the EU. Despite these agreements, challenges persist in various sectors due to tariff impacts on businesses and Canadian exports.
The Bank of Canada is closely monitoring the effects of tariffs on business activities, export demand, and potential cost increases transferred to consumers. While headline inflation rose to 1.9 percent in June, the Bank sees underlying inflation levels around 2.5 percent after removing volatile elements and tax-related fluctuations from the data.
According to Jimmy Jean, chief economist at Desjardin, the decision aligns with expectations as all eyes are on the impending tariff deadline of August 1. Jean believes the current environment favors rate cuts and predicts a possible rate reduction in September to address economic weaknesses proactively.
The Bank outlined three potential scenarios in its monetary policy report, considering different tariff levels and trade war outcomes. The report suggests that the current effective U.S. tariff rate on Canada stands around 7-8%, up from the start of the year.
The central bank anticipates most Canadian goods to be exempt from tariffs in the coming years under the Canada-U.S.-Mexico Agreement. In the base scenario, the economy is expected to recover throughout the year after a decline in the previous quarter.
Different tariff scenarios could impact GDP growth and inflation rates, with a de-escalation scenario offering quicker growth rebound and lower inflation. However, an escalation scenario could lead to a recession by the end of 2025 if tariffs intensify.
Trump’s threat to impose a 35% duty on Canadian imports starting Friday if no trade deal is reached is a concern. The Bank’s forecasts do not specifically address the potential impact of this scenario.