Bank of Canada Holds Rate at 2.25% as Tariffs and Oil Prices Cloud Outlook
Bank of Canada keeps key rate at 2.25%, citing solid Q2 growth but warning of inflation risks from oil prices and trade tensions.
The Bank of Canada has left its benchmark overnight rate unchanged at 2.25%, with the bank rate at 2.5% and the deposit rate at 2.20%. The decision comes as policymakers weigh a broadening domestic recovery against fresh external pressures.
In its statement, the central bank noted that Canadian economic activity strengthened in the second quarter, with GDP expanding at an annualised 3.3% after a weak start to the year. The pick-up was broad-based, with solid gains in consumption, a rebound in housing, and sharp increases in exports and business investment. The unemployment rate edged down to 6.4% in July, though demand for labour remains subdued and the economy continues to operate with excess supply.
However, the Bank cautioned that uncertainty is high. New US tariffs and Canadian counter-measures, announced after the breakdown of bilateral trade talks, pose risks to the sustainability of the recovery. The continuing conflict in the Middle East is also keeping energy prices elevated, and the Bank noted that little progress has been made toward reopening the Strait of Hormuz.
Inflation has hovered around 3% in recent months, driven mainly by higher gasoline prices. Excluding fuel, inflation stood at 2.2%, with core measures close to 2% in July. The Bank warned that the longer high oil prices and elevated refinery margins persist, the greater the risk of spillover into other goods and services. New tariffs could also feed into consumer prices over time.
Globally, the Bank said US growth remains solid on consumer spending and AI-related investment, while the euro area beat expectations in the second quarter and China slowed. Financial conditions have tightened since July, with long-term bond yields rising worldwide and the Canadian dollar appreciating slightly against a weaker US dollar.
Governing Council said recent data reaffirm its view of a broadening recovery, but with upside risks to inflation and greater uncertainty around growth, it will assess the sustainability of the rebound and stands ready to adjust policy as needed.