Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
The overall message from today’s decision is that the Canadian economy has shown resilience to the US tariffs. Nevertheless, uncertainty regarding US tariffs remains high. As a result, the Governing Council reiterated that it will be proceeding carefully with its policy rate, i.e. be patient before acting. Nevertheless, the BoC signals some willingness to cut its policy rate if we see a moderation in inflation.
The BoC continues to make it clear that its primary focus going forward will be to assess the balance between the opposing impacts of the US tariffs on inflation, with lower inflationary pressures stemming from weaker growth and higher inflationary pressures arising from uncertainty, tariffs, counter-tariffs, and supply chain disruptions.
It remains clear that the BoC continued to put more weight on current inflation than on future inflation, and that it would be a mistake to think the BoC will lean toward supporting the economy and allow inflation to move above the target. The recent inflationary episode has demonstrated the disruptive impact of high inflation on the Canadian economy, and the BoC is likely to avoid a similar situation.
What is clear is that the BoC is less forward-looking in the current context of elevated uncertainty and will be more reactive to income data and events. As such, the BoC continues to show “scenarios”, rather than a projection, in its Monetary Policy Report.
Overall, we continue to believe that the general direction for interest rates is lower. However, with the Canadian economy no longer deteriorating, the timing of a cut will likely depend on an easing in underlying inflationary pressures. With the BoC’s measure of core inflation likely to remain at or above 3% in July and August, we think that a cut could be more likely in October than September, at this point, but will also depend on the development on the US tariffs front and the evolution of the labour market.
The BoC left its policy rate unchanged at 2.75%, as widely expected. The statement makes it clear that, given the high level of uncertainty and risks to the outlook, the “Governing Council is proceeding carefully”. This suggests that when in doubt, staying on hold to gather more information will be the default approach for the central bank for some time.
Nevertheless, the opening statement of the press conference shows that the BoC thinks that the most likely direction for the policy rate is down, saying “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”.
The BoC notes that “the global economic consequences of US trade policy have been less severe than feared.”. The Bank notes that the pace of US growth has moderated in the first half of 2025, but the labour market remains resilient, while there are some evidence that tariffs are passing on to consumer prices. In China, “the decline in exports to the United States has been largely offset by an increase in exports to the rest of the world”, while growth in the Euro area has been modest.
On the Canadian economy, the BoC says “US tariffs are disrupting trade but overall, the economy is showing some resilience so far”. After a strong first quarter as a result of the pull-forward in economic activity, especially exports, the BoC expects the economy to contract in the second quarter. The BoC notes that “business and household spending is being restrained by uncertainty”, while employment has held up in non-trade-related industries. Nevertheless, the BoC assess that “a number of economic indicators suggest excess supply in the economy has increased since January”.
In terms of economic outlook, the BoC says that “in the current tariff scenario, after contracting in the second quarter, GDP growth picks up to about 1% in the second half of this year as exports stabilize and household spending increases gradually. In this scenario, economic slack persists in 2026 and diminishes as growth picks up to close to 2% in 2027. In the de-escalation scenario, economic growth rebounds faster, while in the escalation scenario, the economy contracts through the rest of this year”.
On inflation, the BoC notes that “inflation is close to our 2% target, but we see evidence of underlying inflation pressures”. The BoC adds that the stickiness in core measures of inflation “largely reflects an increase in prices for goods other than energy” due to the impact of tariffs and, in our view, the impact of the weak Canadian dollar earlier this year. Under the current tariff scenario, the BoC expect underlying inflationary pressures to ease somewhat.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.