Bank of Canada Holds Rates Steady Amid U.S. Trade Uncertainty

The Bank of Canada opted to keep its policy interest rate unchanged at 2.75% on Wednesday, July 30, 2025, aligning with market expectations as it navigates a landscape clouded by unpredictable U.S. trade policies. In a press conference following the decision, the central bank’s governor highlighted emerging inflationary pressures and economic resilience, while emphasizing a cautious, shorter-term outlook due to ongoing trade uncertainties. The decision reflects a delicate balancing act as Canada grapples with global trade tensions and their potential impact on growth and inflation.

The Bank of Canada’s latest monetary policy report underscored the uncertainty stemming from U.S. tariffs, opting not to provide traditional economic forecasts. Instead, it outlined three scenarios to illustrate possible economic trajectories. In the baseline scenario, which assumes current tariff levels, GDP growth is projected at about 1% in the second half of 2025, rising to 1.8% by 2027, with inflation hovering near the 2% target. A de-escalation scenario envisions stronger GDP growth of around 2% in late 2025, averaging 1.7% through 2027, with inflation dipping in early 2026 before stabilizing near 2%. Conversely, an escalation scenario forecasts a growth slowdown in 2025, recovering to 2% by mid-2026, with inflation peaking above 2.5% in Q3 2026 before settling back to 2% by 2027.

Recent economic data paints a mixed picture. Second-quarter exports plummeted by approximately 25%, while imports declined by about 10%, reflecting trade disruptions. Domestic demand and consumption growth in Q2 were modest, each estimated at just above 1%. The output gap widened to between -1.5% and -0.5%, signaling increased economic slack compared to the first quarter’s range of -1.0% to 0%. Despite these challenges, the central bank noted signs of resilience in the Canadian economy, though it remains cautious due to unpredictable U.S. trade policies.

The Canadian dollar faced pressure following the announcement, with the USD/CAD pair climbing past the 1.3800 mark, hitting two-month highs as the U.S. dollar continued its bullish run. The central bank’s decision to maintain rates within the estimated neutral range of 2.25% to 3.25% reflects a prudent approach, prioritizing stability amid global trade risks. While the threat of escalating trade conflicts has eased since April, the bank remains vigilant, ready to adapt if tariff policies shift.

As Canada braces for potential trade headwinds, the Bank of Canada’s steady hand signals a commitment to balancing inflation control with economic support. The absence of forward-looking forecasts underscores the uncertainty surrounding U.S. trade actions, but the bank’s scenario-based approach offers a glimpse into possible outcomes. With markets closely watching for signals of future rate moves, Canada’s economic resilience will be tested as it navigates this turbulent global environment.