BoC’s Macklem: US trade policy remains unpredictable

Tiff Macklem, Governor of the Bank of Canada, answered reporters’ questions on the central bank’s policy outlook. This followed the recent BoC’s decision to keep its policy rate at 2.75%, which was largely anticipated by the market.

BoC press conference key highlights

We see signs of underlying upside pressure on inflation.

The US trade policy remains unpredictable.

We’re looking at a shorter horizon than usual.

The Canadian economy is showing signs of resilience

This section below was published at 13:45 GMT to cover the Bank of Canada’s policy announcements and the initial market reaction.

In line with market analysts’ expectations, the Bank of Canada held its policy rate steady at 2.75% on Wednesday.

BoC’s policy statement highlights

• The Bank of Canada monetary policy report does not provide economic forecasts and cites uncertainty generated by US tariffs.
• Risk of a severe and escalating global trade conflict has diminished since April.
• Releases a current tariffs scenario as well as two alternative scenarios, one with increased and another with decreased tariffs.
• In the current tariff scenario, GDP grows by about 1% in the second half of 2025 and then picks up, hitting 1.8% in 2027; inflation stays close to 2% over the scenario horizon.
• In the de-escalation scenario, GDP grows around 2% in the second half of 2025 and then averages around 1.7% through the end of 2027; inflation falls in Q1 2026 before rising to close to 2% in 2027.
• In the escalation scenario, growth falls in 2025 before picking up in the first half of 2026 and rising to an average of 2%; inflation rises to just above 2.5% in Q3 2026 and then falls to around 2% in 2027.
• Q2 Canadian exports look to have fallen by around 25%; Q2 imports likely fell by about 10%.
• In all three scenarios, the nominal neutral interest rate in Canada is estimated to be in the range of 2.25% to 3.25%.
• Q2 growth in final domestic demand is estimated to be just above 1%, and Q2 consumption growth is seen at about 1%.
• The Q2 output gap is estimated to have widened to between –1.5% and –0.5% from between –1.0% and 0% in Q1.

Market reaction

The Canadian Dollar (CAD) remains on the defensive in a context of persistent USD buying, with USD/CAD navigating the area of two-month tops beyond the 1.3800 barrier following the BoC’s decision to leave rates unchanged.

As the Bank of Canada (BoC) gets set to issue a new interest rate decision on Wednesday, July 30, there is a growing sense that the cutting cycle might have already ended.

The BoC decided to keep rates steady in June, citing a Canadian economy that is “softer but not sharply weaker” and noting “firmness in recent inflation data.” Indeed, the policy rate stands at 2.75%, which remains within the bank’s estimated neutral range for interest rates, set between 2.25% and 3.25%.

Previewing the BoC’s interest rate decision, analyst Taylor Schleich at the National Bank of Canada noted, “There’s growing momentum around the idea that the easing cycle is over. We disagree, and we don’t expect the Governing Council to validate this more hawkish view. Instead, they’re likely to keep guidance unchanged, reiterating that they’re proceeding carefully and monitoring the same four indicators: export demand; tariff impacts on investment, employment, and spending; inflation; and inflation expectations.”