BoC holds key interest rate at 2.75 per cent as economy shows resilience to tariffs

Signs of resilience in the Canadian economy were enough for the Bank of Canada to leave its benchmark interest rate unchanged on Jul. 30, but the spectre of U.S. trade uncertainty continues to cast a shadow over the central bank’s decisions.

The central bank’s policy rate remains at 2.75 per cent after a third consecutive hold.

Governor Tiff Macklem said in prepared remarks that the governing council’s decision came from a “clear consensus.”

With a backdrop of considerable trade uncertainty, Canada’s economy has yet to deteriorate sharply in the face of U.S. tariffs and underlying inflation is showing some stubbornness.

The Bank of Canada lowers its policy rate when it wants to stimulate the economy but keeps borrowing costs elevated when it’s worried inflation will rise.

Macklem said the economy is showing “some resilience” so far, but he also opened the door to lowering rates if growth slows more sharply.

“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,” he said.

CIBC senior economist Andrew Grantham said in a note to clients on Jul. 30 that the Bank of Canada “appears to be getting a little more comfortable” with the idea that future rate cuts could be needed to support the economy.

He said Macklem’s language gave a hint that rate cuts could be on the table for September, but cautioned that upcoming economic data will have more sway.

Though headline inflation rose two ticks to 1.9 per cent in June, the Bank of Canada sees underlying inflation levels around 2.5 per cent when stripping out volatility and tax changes that are skewing the data.

Canada’s labour market is showing some weakness in tariff-exposed sectors such as manufacturing, but other industries continue to broadly add jobs.

Macklem said the Bank of Canada will be watching how much tariffs affect business activity and demand for Canadian exports, and whether higher costs from those import duties are passed on to customers.

U.S. effective tariff rates are “less than were threatened,” Macklem noted, but are still higher than recent historical experience. The odds of a “severe and escalating” global trade war have diminished in recent months, he said.

While U.S. President Donald Trump has recently struck trade deals with the likes of Japan and the European Union, those agreements still come with some level of tariffs.

Macklem said the nature of those deals suggest “the United States is not returning to open trade.”

Trump has threatened to impose a 35 per cent duty on Canadian imports starting on Aug. 1 if a trade deal isn’t struck between the countries before then. The Bank of Canada’s forecasts don’t specifically address the impact of that possible outcome.