The Bank of Canada held its interest rate at 2.75 per cent for the third straight time on Wednesday, but left the door open for further rate relief if inflation is contained.

“We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs related to tariffs and the reconfiguration of trade,” Bank of Canada governor Tiff Macklem said in Ottawa.

“If a weakening economy puts further downward pressure on inflation and the upward price pressures from trade disruptions are contained, there may be a need for a reduction in the policy interest rate.”

Macklem said there were three reasons that led to the decision, including the ongoing uncertainty from U.S. trade policy, a more resilient Canadian economy and evidence of

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underlying inflation pressures . The central bank also opted not to release a forecast in its monetary policy report, instead presenting three scenarios, with the first encompassing the current tariffs in place as of July 27, the second representing a de-escalation in tariffs and a third showing an escalation in U.S. tariff rates.

“As in April, we have decided not to present a conventional forecast for growth and inflation,” said Macklem. “I want to underline that the lack of conventional forecast does not impede our ability to take monetary policy decisions.”

In the current tariff scenario, sectoral tariffs remain in place on autos, steel and aluminum and tariffs on goods not compliant under the Canada-United-States-Mexico Agreement remain in place. (The Bank estimates that 100 per cent of energy and 95 per cent of all other goods are compliant with CUSMA, and thus not subject to tariffs.) The scenario takes into account the recent deals between the U.S. and the European Union and Japan and Canada’s retaliatory tariffs also remain in place on $60 billion worth of U.S. goods.

Under this scenario, the central bank expects growth to contract in the second quarter, before returning to one per cent in the third quarter, as exports stabilize and household spending strengthens. Growth then picks up in 2026 and reaches 1.8 per cent in 2027.

In the escalation scenario, Canada and Mexico lose their CUSMA exemptions and are subject to a 10 per cent baseline tariff. The U.S. also imposes a 50 per cent tariff on copper and increases its weighted average tariff rate on countries from nine percentage points to 23 percentage points. Canada escalates its retaliatory tariffs on U.S. goods and the China-U.S. trade war worsens.

In this scenario, GDP contracts for the remainder of 2025, with growth picking up slowly in the first half of 2026. Headline inflation rises to just above 2.5 per cent by the third quarter of 2026.

In the de-escalation scenario, sectoral tariffs are halved and the tariff rate on Canadian goods that are not CUSMA compliant falls from 25 per cent to 10 per cent. Canada also removes its retaliatory tariffs.

In this scenario, GDP grows around two per cent for the second half of 2025, and averages 1.7 per cent through the end of 2027. Inflation stays below the two per cent target until late 2026.

The central bank said underlying inflation currently sits at 2.5 per cent, above the headline number of 1.9 per cent, due to the impact of the removal of the carbon tax. The share of CPI components rising by more than three per cent on a year-over-year basis has increased and is above its historic average.

“Inflation in prices for goods excluding energy has increased to 2.2 per cent from about zero in the second half of 2024, above its historical average,” said the report. “This rise is primarily attributed to the pass-through of past increases in import costs across a broad range of products, from motor vehicles and furniture to clothing and coffee.”

Factors that led to this increase include the depreciation of the Canadian dollar against the greenback in late 2024, past growth in shipping costs and past increases in agricultural prices.

Under the current scenario, the central bank also expects residential investment to strengthen during the second half of this year, after it declined by 11 per cent in the first quarter of 2025. It also expects slow population and weak business investment will continue to weigh on potential output growth during the second half of this year.

  • Read the Bank of Canada’s official statement
  • Canada’s counter tariffs could cost Canadians $9 billion this year
  • Canadian dollar’s rise to be tamed by rate cuts, says top forecaster

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