Bank of Canada Holds Rates Steady, Warns US Tariffs Cloud Growth Outlook

The Bank of Canada has decided to hold its benchmark policy interest rate at 2.25%, citing a broad-based economic recovery that is now facing fresh headwinds from US trade actions and elevated energy prices.

In a statement following the Governing Council's latest meeting, Governor Tiff Macklem said recent economic data largely matched the Bank's July forecast. Canada's GDP grew at an annualized pace of 3.3% in the second quarter, rebounding from a weak start to the year. Consumer spending stayed resilient, housing activity picked up after several soft quarters, and exports and business investment rose sharply. The labour market also improved, with the unemployment rate easing to 6.4% in July.

However, Macklem cautioned that new US tariffs on Canadian exports and the federal government's retaliatory counter-tariffs introduce significant uncertainty. While the directly affected goods represent only about 5% of exports to the United States, the broader risk is that businesses delay investment and hiring decisions amid an unclear trade outlook. The Bank noted that federal support programs could mitigate some of the harm to targeted sectors.

On inflation, headline CPI has hovered near 3% in recent months, driven largely by high gasoline prices linked to the ongoing conflict in the Middle East. Excluding fuel, inflation stood at 2.2% in July, with core measures remaining close to the Bank's 2% target. Macklem acknowledged that upside risks to the inflation forecast have increased, particularly if elevated oil prices and refinery margins persist and spill over into other goods and services.

The Governor stressed that monetary policy cannot offset the effects of tariffs or influence global energy prices. Instead, the Bank's role is to ensure price stability is maintained. The Governing Council said it will continue to assess the sustainability of the economic rebound and stands ready to adjust policy as needed.