Bank of Canada Holds at 2.75% — But Hints at Cuts as Trade Tensions Cloud Outlook
Experts weigh in as policymakers avoid a clear forecast, opening the door to rate reductions in the months ahead.
By Albert Laurin | Laurin Immobilier⚜ Media Division
The Bank of Canada (BoC) held its key overnight interest rate at 2.75% on July 30, 2025, pausing for a second consecutive time amid mounting uncertainty around international trade and inflation dynamics. Yet, while the rate itself remains unchanged, the message from Governor Tiff Macklem and the central bank’s Monetary Policy Report (MPR) made one thing clear: the path forward could include cuts — possibly as early as September.
A Forecast Deferred, Again
Citing “unpredictable” U.S. trade policy under President Donald Trump, the Bank did not issue its traditional single-outlook economic forecast. Instead, as it did in April, the BoC presented three divergent scenarios: a baseline assuming current tariffs persist, and two alternates — one for escalation, and one for easing of trade tensions.
“U.S. tariffs are still too unpredictable to be able to provide a single forecast.”
— Tiff Macklem, Bank of Canada Governor
Even the Bank’s baseline assumptions point to rough terrain: an economic contraction of 1.5% in Q2, followed by muted growth for the remainder of 2025. The BoC downgraded its full-year growth projections to 1.3% in 2025 and 1.1% for 2026, a drop from the previously expected 1.8%.
The Inflation Paradox
Canada’s inflation rate, at 1.9% in June, remains close to the BoC’s 2% target — but underlying pressures persist. The Bank acknowledged "evidence of underlying inflation pressures" while also noting factors that could help inflation unwind over time: a strengthening loonie, reduced import costs, and slack in the economy.
“There are reasons to think that the recent increase in underlying inflation will gradually unwind.”
— Tiff Macklem
Still, the outlook remains delicately balanced. As Claire Fan, Senior Economist at RBC, noted in a post-announcement report, any cut would require “a significantly larger international trade shock than is currently in place.”
Expert Forecasts: Will the Bank Cut in September?
Opinions diverge among Canada’s top economists:
- Douglas Porter, Chief Economist at BMO, sees a September cut as unlikely without two “friendly” CPI reports between now and then.
“Two consecutive months of acceptable inflation data may be a tall hurdle.”
- Tiago Figueiredo and LJ Valencia of Desjardins Group believe two of the BoC’s three scenarios suggest cuts are likely, with possibly three cuts before year-end.
“It looks like central bankers are setting up to deliver more monetary easing as early as this September.”
- Joe Brusuelas, Chief Economist at RSM, is more assertive:
“The Bank of Canada can — and should — cut rates twice this year… Rate cuts will bolster the economy and bring down unemployment.”
- Andrew Grantham of CIBC wrote that the Bank is “getting more comfortable” with the idea of additional stimulus.
“The Bank is inching closer to a cut.”
Trade Turmoil and a Fractured World Economy
The primary reason behind the Bank’s cautious stance? Trade.
With 95% of non-energy exports deemed CUSMA-compliant, tariffs may appear manageable. But Governor Macklem warned that the uncertainty itself is the real risk:
“There is a sense that U.S. policy may well remain unpredictable… trust is going to be hard to restore.”
— Tiff Macklem
He also commented on the broader global economic climate:
“The world is fragmenting… That is going to have an impact.”
Carolyn Rogers, Senior Deputy Governor of the BoC, echoed the need for domestic investment, highlighting that Canada’s defence spending target of 5% of GDP by 2035 could ultimately boost long-term productivity.
Small Businesses and Mortgage Holders Caught in the Crossfire
The Canadian Federation of Independent Business (CFIB) reports that SMEs are already absorbing a disproportionate share of tariff-related costs.
- 70% of importers paid the full Canadian tariff (median cost: $9,000)
- 63% of exporters absorbed or shared U.S. tariff costs (median cost: $22,500)
“SMEs likely won’t be able to act in the long-term as a primary economic buffer against tariffs.”
— Simon Gaudreault, CFIB Chief Economist
In housing, Victor Tran of Rates.ca told Yahoo Finance Canada that fixed and variable mortgage rates continue to hover in the low-to-mid 4% range, offering little short-term relief.
Investor Implications and the Loonie
According to Vanguard Canada, two additional rate cuts are expected by year-end, potentially bringing the overnight rate to 2.25%.
But as Karl Schamotta of Corpay noted:
“There’s light at the end of the tunnel for the Canadian economy and the loonie, but it remains far off in the distance.”
If the U.S. dollar strengthens and the BoC leans dovish, the Canadian dollar (CAD) could fall toward 1.39 against the greenback.
Final Thoughts: The Waiting Game Continues
In the absence of a decisive base-case forecast, the Bank of Canada has left the door ajar — not wide open — to rate cuts. The September 17 decision now hinges on inflation data, trade escalations, and fiscal signals from Ottawa.
“Our future decisions are going to depend on what happens in the future… We're ready to respond to new information.”
— Tiff Macklem
As Derek Holt of Scotiabank succinctly put it:
“They haven’t a clue what to do next.”
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📚 References
- MacFarlane, J., Lagerquist, J., & Golob, L. (2025, July 30). Bank of Canada holds key rate at 2.75%, signals possible cuts ahead amid Trump tariff uncertainty. Yahoo Finance Canada. Retrieved from https://ca.finance.yahoo.com
- Bank of Canada. (2025, July 30). Monetary Policy Report – July 2025. Retrieved from https://www.bankofcanada.ca/publications/mpr/
- Fan, C. (2025, July 30). RBC Economics Commentary on BoC July Decision. RBC Economics.
- Porter, D. (2025, July 30). Market Insight – BMO Economics. BMO Financial Group. Retrieved from https://economics.bmo.com
- Figueiredo, T., & Valencia, L.J. (2025, July 30). Policy Outlook – Desjardins Group. Desjardins Group.
- Brusuelas, J. (2025, July 30). Economic Forecast – RSM Canada Commentary. RSM Canada.
- Grantham, A. (2025, July 30). Monetary Update – CIBC Economics. CIBC Capital Markets.
- Gaudreault, S. (2025, July 30). CFIB Report on SME Tariff Burden. Canadian Federation of Independent Business (CFIB). Retrieved from https://www.cfib-fcei.ca
- Tran, V. (2025, July 30). Mortgage Market Commentary – Rates.ca. Rates.ca
- Dewan, A. (2025, July 30). Vanguard Canada Policy Rate Outlook. Vanguard Canada.
- Schamotta, K. (2025, July 30). Market Strategy Report – Corpay. Corpay.
- Holt, D. (2025, July 30). Scotiabank Economics Commentary. Scotiabank.
- Rogers, C. (2025, July 30). Remarks on Defence Spending and Productivity. Bank of Canada Press Briefing.