Canada's Central Bank Holds Steady: Why the BoC Hit Pause (Again) on Rates

The Bank of Canada (BoC) announced on July 30, 2025, its decision to maintain its key overnight interest rate at 2.75%. This marks the third consecutive hold, following rate cuts in late 2024 and early 2025. The Bank Rate remains at 3% and the deposit rate at 2.70%. This decision reflects a careful balance between signs of domestic resilience, ongoing inflation concerns, and significant global trade uncertainty.

The BoC's Balancing Act: Key Factors Behind the Hold

To understand the Bank of Canada's decision, it is helpful to examine the key economic indicators that inform its monetary policy. The following table provides a snapshot of the crucial figures considered on July 30, 2025:

Indicator	Value (as of July 30, 2025)	Source
BoC Overnight Rate	2.75%
June 2025 CPI (Year-over-Year)	1.9%
June 2025 Unemployment Rate	6.9%
Q2 2025 GDP Growth (CFIB Forecast)	-0.8%

This quick reference immediately highlights the conflicting signals within the Canadian economy. While the interest rate remains stable and inflation is near target, there are indications of both resilience (like falling unemployment) and weakness (such as negative GDP forecasts). This complex interplay of data points underscores the challenging environment in which the BoC operates, necessitating a cautious and measured approach.

Economic Resilience vs. Underlying Weakness

The Bank of Canada cited "some" domestic resilience to U.S. trade disruptions as a reason for holding rates. Charles St-Arnaud, Chief Economist at Alberta Central, noted that Canada's economy is "no longer deteriorating," with a recovery in business and consumer confidence. The BoC's Monetary Policy Report also stated that economic activity, though slowed by trade conflict, shows "signs of resilience".

However, the Canadian Federation of Independent Business (CFIB) predicted negative GDP growth of -0.8% for Q2 and Q3 2025, citing persistently low business confidence due to trade tensions and weakness in manufacturing. Private investment also contracted significantly in Q1 2025 and is expected to drop further in Q2 and Q3. This divergence suggests the BoC's "resilience" might mean stabilization rather than robust growth, justifying a steady rate to avoid both premature tightening and aggressive easing into a fragile economy.

Inflation's Nuanced Picture

Canada's headline inflation rose to 1.9% in June, near the BoC's 2% target. However, the Monetary Policy Report noted that "underlying inflation has picked up" to about 2.5%. Core inflation measures in May showed a mixed picture. The BoC believes this "stickiness in inflation will be temporary," as stated by Charles St-Arnaud. Governor Tiff Macklem emphasized the bank's mandate to control price growth. This view allows the BoC to hold rates, avoiding tightening into a potentially weak economy, while expecting tariff-related and other temporary pressures to subside. June's CPI acceleration was partly due to smaller declines in gasoline prices and faster growth in durable goods and clothing/footwear, with tariffs cited as a factor. Shelter inflation, though lower, still contributed significantly.

The Overarching Shadow of Trade Uncertainty

The unpredictable nature of US trade policy and higher tariffs remain the most significant factor clouding Canada's economic outlook. The BoC acknowledged increasing clarity but stressed the outlook remains unclear without a trade deal. Governor Macklem emphasized preventing tariffs from becoming an inflation problem. Tariffs are expected to weigh on Canadian economic activity, impacting business investment, employment, and household spending. The Canadian Survey of Consumer Expectations (CSCE) showed consumers are cautious about spending, with many citing tariffs as the most important factor affecting the BoC's ability to control inflation. Tariffs have already contributed to higher clothing and footwear prices. The IMF also flagged significant downside risks from potential tariff rebounds. This complex external shock, simultaneously dampening demand and raising costs, justifies the BoC's strategic pause to assess these volatile forces.

The Labour Market's Mixed Signals

Canada's labour market saw a surprising gain of 83,000 jobs in June, the first increase since January, dropping the unemployment rate to 6.9%. However, 70,000 of these new jobs were part-time. While economists like Joe Brusuelas noted solid private sector hiring , Charles St-Arnaud cautioned the overall labour market remains "weak" this year. The CFIB even predicted employment contraction in Q2 and Q3. This part-time heavy growth suggests employer caution and doesn't signal robust economic health or strong wage pressures, reinforcing the BoC's cautious stance.

Consumer Spending: Caution Prevails

Canadian consumers "tightened their purse strings" in Q2 2025, with real spending expected to be "essentially flat" and weaker momentum into Q3. Year-over-year card spending growth slowed sharply to 1.5% in Q2 from 5.4% in Q1, reflecting softening economic conditions. Declines were seen across goods and services, including travel. Consumers' elevated fear of job loss and trade uncertainty are key factors, as they are "unlikely to splurge on large purchases when they're worried about losing their jobs". This direct link between trade uncertainty and reduced domestic demand reinforces the BoC's cautious, data-dependent approach.

What the Experts Are Saying: Reactions and Future Outlook

Economists largely anticipated the rate hold. While there's a divergence on future cuts, the BoC's forward guidance hints at potential reductions if a weakening economy and contained trade-related price pressures allow. Governor Macklem's conditional statement allows the bank flexibility in an unpredictable trade environment, signaling a data-dependent approach rather than a rushed commitment.

Here is a summary of various economist forecasts for the BoC policy rate by the end of 2025:

Institution/Economist	Forecasted Rate (End 2025)	Brief Rationale/Notes
Vanguard Canada (Ashish Dewan)	2.25%	Lower growth environment
RSM (Joe Brusuelas)	Two more cuts (implies ~2.25%)	Economy strong enough to absorb trade disruption, solid hiring
Scotiabank	2.75%	Maintain for rest of 2025 (tariff uncertainty could delay 2026 cuts)
CIBC (Benjamin Tal)	2.5% or 2.25%	Lowering by year-end/early 2026

This table explicitly highlights the divergence in expert opinions regarding future rate cuts, despite a general consensus on the July 30th hold. This disagreement stems from different interpretations of the same underlying, often conflicting, economic data. By presenting these varied forecasts side-by-side, it underscores the high degree of uncertainty in the economic outlook, even among seasoned professionals. It visually demonstrates that there is not a single, clear consensus on the future path of rates, which reinforces the BoC's own cautious and data-dependent approach. For the reader, this provides a crucial takeaway: there is no guaranteed path for interest rates, and they should be prepared for different scenarios. It also encourages understanding the reasons behind these varied forecasts, rather than just the numbers, which aligns with the goal of demystifying policy and fostering a deeper understanding of economic forces.

Recent market-based forecasts (CORRA forward curve data) generally expect the BoC rate to remain at 2.75% into early 2026, edging down to 2.50% by end-2026, and then holding at 2.50% through at least 2027.

Implications for Canadians: Your Wallet and Beyond

The Bank of Canada's decision to hold its key interest rate at 2.75% has several implications for the Canadian economy, affecting homeowners, businesses, and everyday consumers.

Homeowners and Mortgages

For variable-rate mortgage holders, payments remain stable. Fixed rates might see some improvement by year-end, contingent on trade certainty, though upward pressure from bond yields exists. While there's pent-up housing demand, tariff threats could freeze it. Uncertainty, not affordability, is the main barrier. For many Canadians, this stability means no immediate relief from financial pressure, highlighting the trade-off between managing external risks and providing domestic relief.

Businesses

For businesses, the stability offered by a steady interest rate is generally welcomed, with Phil Soper of Royal LePage noting it's "never a bad thing for business confidence". Business confidence has "inched up a little bit" from earlier lows. However, the CFIB's report on persistently low business confidence due to trade tensions and contracting private investment  suggests that while rate stability is positive, it is not a panacea for deeper structural issues.

Everyday Consumers

For the average Canadian, the hold means unchanged borrowing costs on loans and lines of credit tied to the prime rate. However, this comes amidst widespread financial stress, with 64% of adult Canadians "desperately need" a drop in rates. Consumers' fear of job loss is elevated, and they are becoming more cautious about spending due to trade conflict uncertainty. The BoC's decision, while strategically sound, means continued financial strain for many Canadians.

A Global Perspective: Canada in the World Economy

The IMF upgraded its global growth outlook for 2025 to 3%, citing factors like "front-loading" (early stockpiling) ahead of US tariffs, a weaker US dollar, and improved financial conditions. While positive, this "front-loading" suggests a temporary, artificial boost rather than sustainable growth, as demand is pulled forward. This means global momentum is built on trade uncertainty, reinforcing the BoC's cautious stance. The IMF also warned of downside risks from potential tariff rebounds and geopolitical tensions, despite expecting global inflation to decline.

Conclusion

The Bank of Canada's decision to hold its key interest rate at 2.75% on July 30, 2025, reflects deep caution amid high uncertainty. The BoC balances emerging domestic resilience, particularly in the labour market, against persistent underlying inflation and unpredictable US trade policy. While the economy shows signs of stabilizing, tariffs continue to weigh on investment and consumer spending, necessitating a "wait and see" approach. The bank's core aim is to prevent trade disruptions from becoming a broader inflation problem.

The future path for Canadian interest rates is highly data-dependent and tied to geopolitical events. Key indicators include the evolution of trade policy, inflation trajectory, business investment and confidence, consumer spending, and global economic developments. While many economists foresee further rate cuts by year-end or early 2026, the BoC will proceed carefully, requiring Canadians to remain vigilant as the economic picture unfolds under global trade dynamics.