The Bank of Canada Holds Interest Rate at 2.25%
The Bank of Canada held its interest rate at 2.25% as widely expected, but struck a firmer tone on inflation, saying the upside risks have increased while new tariffs have made the outlook for growth more uncertain. Key takeaways from Governor Macklem's statement:
The BOC kept is rate at 2.25%, the decision marked the seventh time in a row that the central bank has kept its key policy rate unchanged, leaving borrowing costs untouched for 11 months since the easing cycle ended last October.
"The upside risks to inflation have increased," the BOC said in its statement, pointing to the continuing conflict in the Middle East keeping global energy prices high. Inflation rose to 3.0% in July from 2.8% in June, driven largely by a volatile stretch for gas prices through the spring and summer.
Growth has been the bright spot. The economy rebounded at a 3.3% annualized pace in the second quarter after stagnating for much of the past year, though few analysts expect that pace continued into the current quarter. Macklem said exports were rising and businesses were showing signs of adapting to trade restrictions, and that the data reaffirm the Bank's view of a broadening recovery.
On trade, the United States imposed 50% tariffs on a range of Canadian goods on August 22, and Canada's retaliatory tariffs are scheduled to take effect September 8. Macklem said the Bank does not expect a large direct impact on the overall economy, though targeted sectors could be hit hard, and cautioned that counter-tariffs raise costs for Canadian businesses that could be passed through to consumer prices over time.
Governor Macklem stated, "Monetary policy cannot offset the effects of tariffs or influence global energy prices," adding that the Bank's role is to ensure global developments do not jeopardize price stability in Canada. Because the economy is evolving broadly in line with the July forecast, Governing Council opted to leave the rate unchanged but said it will assess the sustainability of the rebound and the inflation outlook and is prepared to adjust policy as needed.
Economists have said the conflicting risks gave the central bank room to wait and assess the impact of the tariffs before changing borrowing costs. Which is in line with the Banks continued process to monitor data before deciding on rate changes.
The Bank of Canada will make its next interest rate decision on October 28th, alongside an updated Monetary Policy Report.