July 24, 2025
The Bank of Canada decides on interest rates next week and virtually everyone thinks a hold is a “no-brainer.”
The rebound in core inflation and a strong June jobs report have convinced economists that the central bank will continue to wait for more clarity on the impact of U.S. President Donald Trump’s trade war. The bank last cut its rate in March to 2.75 per cent.
Policy uncertainty, inflation and economic resilience were the three key reasons the bank held in June, its summary of deliberations revealed.
“With all three of these still largely ringing true, next week’s decision seems a no-brainer,” said Bradley Saunders, North America economist for Capital Economics.
The timing of the bank’s July 30 decision is tricky, coming just two days before U.S. tariffs on Canadian goods not covered by the Canada-United States-Mexico Agreement (CUSMA) are set to rise to 35 per cent, unless a deal is reached.
But economists doubt policy makers would gamble on that outcome.
Markets now see less than a 10 per cent chance that the Bank of Canada will cut this month, and are pricing in less than one full cut for the rest of the year, which Bank of America economists think is reasonable considering the inflation risks.
Royal Bank of Canada economists reckon the central bank has done cutting rates this cycle, while the Bank of Nova Scotia forecasts the next rate cut will not come until the second quarter of 2026.
But others, including Capital Economics, think the central bank will find reasons to reduce its rate before that.
Capital believes a new trade deal will not turn the economy around immediately.
“Uncertainty generated by the events of the past few months will stick in the minds of businesses for a while, weighing on investment intentions — especially with the upcoming renegotiation of the USMCA giving Trump a fresh opportunity to exercise his chaotic deal-making playbook,” said Saunders.
Recent surveys also show that businesses facing softer consumer demand will cut back on hiring, suggesting that June’s jump in employment is unlikely to be repeated, he said.
Capital no longer expects a recession, but they do forecast growth of less than 1 per cent on average for the rest of the year.
“This would be below potential, providing scope for the bank to lower interest rates twice more down to 2.25 per cent,” said Saunders.
Economists at CIBC, Bank of Montreal and Toronto Dominion Bank also see more cuts ahead.
And there’s still another wild card — the United States Federal Reserve.
“Any resumption of Fed rate cut in the coming months could prompt the BoC to also cut in tandem, in our view, especially now that U.S. tariffs on Canada has become stickier than previously assumed,” said BofA Global Research.
Though Fed chair Jerome Powell has come under pressure to cut rates from President Trump, who has even threatened to replace him, market bets show less than a 3 per cent chance of that happening this month.
Those odds, however, rise to 60 per cent in September.
So while Canadians hoping for lower rates are not likely to get instant gratification, relief could be on its way — eventually.
