The Bank of Canada left its policy rate unchanged at 2.75%, marking a third consecutive pause in its rate-cutting cycle. While the decision was widely anticipated, the Bank’s tone and updated forecasts suggest a growing openness to further easing.
“A number of economic indicators suggest excess supply in the economy has increased since January,” the Bank noted in its Monetary Policy Report (MPR). The output gap is now estimated between -1.5% and -0.5%, up from the previous range of -1.0% to 0%. At the same time, core inflation remains elevated at roughly 2.5%, too high for comfort but below the 3%+ pace seen earlier this year.
Trade disruptions tied to U.S. tariffs are weighing heavily on the Bank’s outlook. The MPR forecasts a 1.5% contraction in Q2 GDP due to the pull-forward of exports earlier this year and declining U.S. demand. Modest growth of just 1% is projected for Q3. The Bank expects full-year growth of 1.3% in 2025 and 1.1% in 2026 under its base-case scenario, which assumes current tariff levels remain in place.
For the second straight MPR, the Bank avoided publishing a single base-case projection. Instead, it presented three scenarios: current tariffs, de-escalation, and escalation, highlighting just how uncertain the trade landscape has become.
Inflation is expected to hover near 2% under the current scenario, with upward price pressures from tariffs offset by slower demand and a stronger Canadian dollar.
What economists are watching
Economists broadly agree the Bank is maintaining flexibility in its policy stance, remaining open to future cuts while holding the line for now to assess incoming data and the evolving trade environment.
Douglas Porter, Chief Economist at BMO, said the Bank appears “perfectly comfortable” holding rates at 2.75%, the midpoint of its estimated neutral range. But he noted that more clarity on trade and inflation will be needed to shift the policy stance. “Further rate cuts will depend on ongoing economic softness and inflation pressures fading,” he wrote.
TD Senior Economist Andrew Hencic said the BoC’s current outlook leaves space for cuts in the months ahead. “A plausible path for the economy is one that lands somewhere between the current and de-escalation scenarios,” he noted. “The resulting build-up in excess supply means there’s still scope to reduce the overnight rate.”
Markets watching for data ahead of September decision
The Bank’s next rate decision comes September 17. By then, fresh GDP and inflation data—already expected to show a Q2 slowdown and core inflation near 2.5%—could raise the odds of another cut.
Still, today’s messaging reinforces that future moves will be driven by real-time developments. As Porter put it, “those looking for cuts may need to pack their patience.”
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Last modified: July 30, 2025
