Bank of Canada’s interest rates remain unchanged, but the flag continues to grow for future cuts
Bank of Canada’s policy interest rates remained unchanged at 2.75%, marking the third consecutive pause of its cut rate cycle. Despite widespread expectations, banks’ tone and updated forecasts suggest that further relaxation is becoming increasingly open.
“Many economic indicators indicate excessive economic supply increases.” The bank notes in its Monetary Policy Report (MPR). Now, the output gap is estimated between -1.5% and -0.5%, from the previous range of -1.0% to 0%. Meanwhile, the core inflation rate remains at about 2.5% high, not comfortable, but is below the 3%+ speed earlier this year.
Trade disruptions related to U.S. tariffs hit banks’ outlook severely. MPR predicts that Q2 GDP will shrink by 1.5% due to declines in exports and U.S. demand earlier this year. Moderate growth in the third quarter is expected to be only 1%. The bank expects to grow 1.3% in full year in 2025 and in its base case, 1.1% in 2026, which is the current tariff level that remains.
For a second continuous MPR, the bank avoids publishing a single base case projection. Instead, it proposes three situations: current tariffs, downgrades and escalations, highlighting how uncertain the trade pattern has become.
In the current situation, inflation is expected to hover near 2%, while slower prices, slower demand and stronger Canadian dollar prices will offset the upward pressure on prices.
What economist is watching
Economists broadly agree that the bank maintains flexibility in its policy stance, maintains a future cut-down attitude, while holding the line to assess incoming data and an evolving trade environment.
Douglas Porter, chief economist at BMO, said the bank’s holding price was 2.75%, which is the midpoint of its estimated neutral range. But he pointed out that changing policy stances requires a better understanding of trade and inflation. “The further reduction will depend on the continued economic softness and the disappearance of inflationary pressures,” he wrote.
Andrew Hencic, a senior economist at TD, said the current outlook for BOC provides room for cutting space in the coming months. “For the economy, this is a reasonable pathway, between the current and the downgrade plan,” he noted. “The resulting oversupply means there is still a range to reduce the overnight speed.”
Markets watch data before September decision
The bank’s next tax rate decision was filed on September 17. At that time, fresh GDP and inflation data (which are expected to show a slowdown in the second quarter and core inflation approaching 2.5%) may increase the chances of another cut.
Nevertheless, today’s messaging enhances future actions will be driven by real-time development. As Porter said, “Those who seek cuts may need to clean up their patience.”
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Last modified: July 30, 2025
