The Bank of Canada today maintained
its target for the overnight rate at 2.75%,
with the Bank Rate at 3%
and the deposit rate at 2.70%.

While some elements of US trade policy have started
to become more concrete in recent weeks, trade negotiations are fluid, threats
of new sectoral tariffs continue, and US trade actions remain unpredictable.
Against this backdrop, the July Monetary Policy Report (MPR)
does not present conventional base case projections for GDP growth and
inflation in Canada and globally. Instead, it presents a current tariff
scenario based on tariffs in place or agreed as of July 27, and two
alternative scenarios—one with an escalation and another with a de-escalation
of tariffs.

While US tariffs have created volatility in global
trade, the global economy has been reasonably
resilient. In the United States, the pace of growth
moderated in the first half of 2025, but the labour market has remained
solid. US CPI inflation ticked
up in June with some evidence that tariffs are starting to be passed on to consumer prices. The euro area economy grew
modestly in the first half of the year. In China, the
decline in exports to the United States has been largely offset by an increase
in exports to the rest of the world. Global oil prices
are close to their levels in April despite some volatility. Global equity markets have
risen, and corporate credit spreads have narrowed. Longer-term government bond yields have moved up.
Canada’s exchange rate has appreciated
against a broadly weaker US dollar.

The current tariff scenario has
global growth slowing modestly to around 2½% by the end of 2025 before
returning to around 3% over 2026 and 2027.

In Canada, US tariffs are disrupting trade but
overall, the economy is showing some resilience so far. After robust growth in
the first quarter of 2025 due to a pull-forward in exports to get ahead of
tariffs, GDP likely declined
by about 1.5% in the second quarter.
This contraction is mostly due to a
sharp reversal in exports following the pull-forward, as well as
lower US demand for Canadian goods due to tariffs.
Growth in business and household
spending is being restrained by uncertainty. Labour market
conditions

have weakened
in sectors
affected by trade, but
employment has held up
in other parts
of the economy.
The unemployment rate has moved up gradually since
the beginning of the year to 6.9% in June
and wage growth has continued to ease. A number of
economic indicators suggest excess supply in the economy has increased since
January.

In the current tariff scenario, after
contracting in the second quarter, GDP growth picks up to about 1% in the
second half of this year as exports stabilize and household spending increases
gradually. In this scenario, economic slack persists in 2026 and diminishes as
growth picks up to close to 2% in 2027. In the de-escalation scenario,
economic growth rebounds faster, while in the escalation scenario,
the economy contracts through the rest of this year.

CPI inflation was 1.9% in June, up slightly
from the previous month. Excluding taxes, inflation rose
to 2.5% in June, up from around 2% in the second half of last year. This
largely reflects an increase in non-energy goods prices. High shelter price
inflation remains the main contributor to overall inflation, but it continues
to ease. Based on a range of indicators, underlying inflation is
assessed to be
around 2½%.

In the current tariff scenario, total
inflation stays close to 2% over the scenario horizon as the upward and
downward pressures on inflation roughly offset. There are risks around this
inflation scenario. As the alternative scenarios illustrate, lower
tariffs would reduce the direct upward pressure on inflation
and higher tariffs would increase it. In addition, many businesses are
reporting costs related to sourcing new suppliers and developing new markets.
These costs could add upward pressure to consumer
prices.

With still high uncertainty, the Canadian economy
showing some resilience, and ongoing pressures on underlying inflation, Governing
Council decided to hold the policy interest rate unchanged.
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. 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.

Governing Council
is proceeding carefully, with particular attention to the risks and
uncertainties facing the Canadian
economy. These include: the extent to which higher US tariffs reduce demand for
Canadian exports; how much this spills over into business investment,
employment and household spending;
how much and how quickly
cost increases from tariffs and trade disruptions are passed on to consumer prices; and how inflation
expectations evolve.

We are
focused on ensuring that Canadians continue to have confidence in price
stability through this period of global upheaval. We will support economic
growth while ensuring inflation remains well controlled.

A summary of the old and the new:

Policy Decision

• Old: The Bank of Canada “maintained its target” rate.

• New: The Bank of Canada reduced the overnight rate by 25 basis points to 2.75% (Bank Rate 3.0%, Deposit Rate 2.5%).

Global Backdrop

• Old: Global economy described as reasonably resilient despite tariffs.

• New: Global economy is now showing signs of slowing under “sharply higher US tariffs and ongoing uncertainty.”

• Old: US growth described as strong with solid labor market.

• New: US growth has moderated, with slower job gains and more cautious consumers.

• Inflation: Old text said US CPI ticked up in June; new text says inflation has picked up in recent months as tariffs are being passed on to consumers.

• Euro area: Changed from “grew modestly” to “growth has moderated.”

• China: Old text stressed resilience; new text highlights softening growth and weaker investment.

• Financial markets: Old text: higher equity markets, tighter credit spreads, lower yields. New: financial conditions have eased further with the same outcomes.

• Canadian dollar: Old text said CAD “appreciated against a weaker USD”; new says CAD stable vs. USD.

Canadian Economy

• Old: Q1 robust growth, Q2 GDP expected decline of 1.5%.

• New: Confirms Q2 GDP contracted by 1.5% with exports falling 27%, driven by reversal of Q1 pull-forward and weaker US demand.

• Business investment: Old text said growth slowed; new says business investment declined.

• Consumption/housing: Old said both grew at a healthy pace; new notes household spending restrained by weak labor market and uncertainty.

• Employment: Old said job losses concentrated in trade sectors while other areas held up.

• Slack: New explicitly says excess supply in the economy has increased.

Outlook & Scenarios

• Old: GDP expected to “pick up to 1% in H2 2025.”

• New: Same baseline, but emphasizes slack persists through 2026 and closes only by 2027.

• Alternative scenarios: Unchanged (faster rebound with de-escalation, contraction with escalation).

Inflation

• Old: CPI was 1.9% in June, with core ~3%.

• New: CPI was 1.9% in August, core measures around 2.5–3% but upward momentum has dissipated.

• Shelter costs: Both note high but easing.

• Risks: Old stressed tariff scenarios; new adds that removal of retaliatory tariffs lowers inflation pressures, but new supplier costs could push consumer prices higher.

Governing Council Decision

• Old: With uncertainty, resilience, and inflation pressures, Council decided to hold rates.

• New: With weaker economy and reduced inflation risks, Council judged that a rate cut was appropriate to better balance risks.

• Forward-looking: Both stress ongoing monitoring of trade impacts, business investment, employment, and inflation expectations.

✅ In short: The biggest change is the policy shift from holding rates steady to cutting 25bps. The tone on the global economy, US outlook, Canadian GDP, and labor market is more negative, and the inflation assessment is softer with more emphasis on easing pressures.