The Bank of Canada left its target interest rate unchanged at 2.75 percent for the third consecutive meeting, as expected by forecasters in an Econoday survey. The central bank cited the resilience of the Canadian economy and ongoing pressures on core inflation, adding it continues to proceed carefully.

In his opening statement of a press conference following the policy announcement, Governor Tiff Macklem said, At this rate decision, there was clear consensus to hold our policy rate unchanged. The minutes of the June meeting had pointed out some diversity of views on the most likely path ahead.

The impact of trade policy and related uncertainty on Canada's economic activity and inflation remains the key determinant for the interest rate path forward. 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 said.

It continues to monitor the impact of U.S. tariffs on Canadian exports, how this in turns spills over to business investment, employment and consumer spending. As it mentioned in its June statement, the Bank also continues to assess the extent and speed at which businesses pass on cost increases to consumers while monitoring inflation expectations.

Overall, in the face of the ongoing unpredictability of U.S. trade actions despite some more concrete elements in recent weeks, the central bank continues to avoid providing its conventional base case scenario, offering three possible paths instead: the current scenario, an escalation scenario, and a de-escalation scenario.

Under the current scenario based on tariffs already in place, Canada's GDP growth contracts in the second quarter of 2025. It recovers to about 1 percent in the second half of this year as exports stabilize and household spending increases gradually. Weakness continues next year before growth picks up to close to 2 percent in 2027. Inflation, currently at 1.9 percent, remains close to 2 percent throughout the horizon as upward and downward pressures offset each other.

Under the de-escalation scenario, GDP growth rebounds faster and inflation is expected to remain below the 2% target until late 2026. Inflation would average around 2 percent in 2027.

Under the escalation scenario, growth contracts through the end of 2025. CPI inflation is projected to peak at just above 2.5% in the third quarter of 2026, before receding to around 2 percent in 2027.

In all three scenarios, the neutral nominal rate is assumed to be between 2.25 percent and 3.25 percent. At 2.75 percent, the current policy rate sits at the middle of the neutral range.

Overall, the central bank left the door open to further rate cuts to support growth as long as inflation can remain under control.

The BoC made its announcement as uncertainty remains around the outcome of the most recent round of trade negotiations. U.S. President Donald Trump set an Aug. 1 deadline for reaching a deal, without which he said it will impose 35 percent tariffs on Canadian goods. Prime Minister Mark Carney has recently shifted his messaging to signal that some level of tariffs will remain.

Forecasters expect the bank to leave rates on hold at 2.75 percent as they did April and June. The economy has been holding up fairly well with the job market showing signs of stabilizing while inflation has been unexpectedly sticky. And that trade war just hasn’t hit as hard as feared.

Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.

Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.

Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.