Bank of Canada Interest Rate Announcement (July 30, 2025)

Bank of Canada holds rates as trade uncertainty persists 

• The Bank of Canada (BoC) held its policy rate at 2.75%, in line with market expectations. 
• The Bank acknowledged that "some elements of US trade policy have started to become more concrete in recent weeks" but also noted that "trade actions remain unpredictable." It once again opted to present multiple scenarios, with an outlook conditioned on the current tariff situation and two alternatives – de-escalation and escalation.  
• Under the current tariff trajectory, the Bank would expect growth to recover to roughly 1% quarter-on-quarter (annualized, q/q) in the second half of 2025 after the anticipated 1.5% q/q contraction in Q2. Importantly, "Consumer price index (CPI) inflation stays close to the 2% target over the scenario horizon" as the effects of tariffs and the temporary effect of the removal of the carbon tax are offset by easing shelter costs, excess supply and a stronger CAD. 
• Regarding the future path of its policy rate, the bank stated that it will continue to focus on inflation, noting that "[i]f a weakening economy puts further downward pressure on inflation and upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate." 

Key Implications

• Not much of a surprise from the BoC today. The outlook for the economy under the current tariff regime shows a modest recovery starting in the third quarter, but with an economy expanding below trend. This leaves the door open for future rate cut(s) under stable inflation.
• The BoC remains in data-dependency mode, with the monthly flow of information determining the need, or scope, for further cuts. From our lens, a plausible path for the economy is one that lands somewhere between the current and de-escalation scenarios presented by the BoC. In that space, inflation will remain contained over the coming months, and the key will be the scale of any bounce-back in Q3 and Q4 growth. The resulting build-up in excess supply means there's still scope to reduce the overnight rate in the coming months. However, the BoC is unlikely to push below the bottom end of their neutral range (2.25%).

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