Bank of Canada holds rates steady, says risk of a global trade war has lessened

By Promit Mukherjee and David Ljunggren

OTTAWA, July 30 (Reuters) – The Bank of Canada held its key policy rate at 2.75% for the third time in a row on Wednesday, as expected, and said the risk of a severe and escalating global trade war had diminished.

But for the second quarter in a row, the central bank declined to give detailed forecasts for the Canadian economy, citing the high uncertainty around U.S. trade policy.

The bank also said that if the economy weakened further it could cut rates, as long as upward pressures on inflation were kept under control.

Although Canada faces a slew of tariffs on three sectors, the overall effects have largely been contained. The economy has weakened only slightly, job growth is robust and closely-tracked metrics of core inflation are firm.

“Canada’s economy is showing some resilience so far… inflation is close to our 2% target, but we see evidence of underlying inflation pressures,” said Governor Tiff Macklem.

The situation could substantially change on August 1, the deadline for the United States and Canada to reach a trade deal. U.S. President Donald Trump has threatened to impose 35% on some Canadian goods on that date.

The BoC aggressively eased rates by 225 basis points starting in June last year but has stayed on the sidelines since March, waiting to assess the impact of tariffs on the economy and prices.

“Since April, the risk of a severe and escalating global trade conflict has diminished,” the bank said in its quarterly monetary policy report. “Nevertheless, how U.S. trade policy will unfold remains highly uncertain.”

Rather than issuing forecasts, the bank presented three different scenarios on how events might unfold.

The first scenario assumes existing tariffs on steel, aluminum, automobiles and on goods not compliant with a continental free trade pact will be maintained. GDP contracts by 1.5% in the second quarter of 2025 and rises by 1% in the second half before reaching 1.8% in 2027.

Total inflation stays close to 2% over the next two years.

The other scenarios look at what would happen if tariffs around the world decrease or increase.

In the de-escalation scenario, lower tariffs improve the growth outlook and reduce the direct cost pressures on inflation while in the opposite scenario, higher tariffs weaken the economy and increase direct cost pressures, Macklem said.

“We will be following tariff developments closely and assessing indicators of underlying inflation,” he said, adding that the central bank would continue to support economic growth while ensuring inflation remained well controlled.

“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,” he said.

((Reuters Ottawa bureau))

Keywords: CANADA CENBANK/