Bank of Canada Senior Deputy Governor Carolyn Rogers looks on as Governor Tiff Macklem speaks during a news conference in June, 2024.Adrian Wyld/The Canadian Press
The Bank of Canada’s governing council is divided on whether more interest rate relief may be needed to navigate the economic slowdown caused by the trade war with the United States, according to a summary of the discussions ahead of last month’s rate decision.
The central bank held its benchmark policy rate at 2.75 per cent for the third consecutive time on July 30, citing the surprising resilience of the Canadian economy in the face of tariffs and recent hot inflation readings.
There was consensus on the seven-member governing council, led by Governor Tiff Macklem, for a hold. But there were differing views about where monetary policy should go from here, and what role the bank should play in helping the Canadian economy adjust to a new global trading regime defined by U.S. protectionism.
“Some members held the view that, having reduced the policy interest rate to the middle of the Bank’s estimated range of the neutral interest rate, and the economy showing some resilience to U.S. tariffs, the Bank may have already provided sufficient support to aid in this transition,” say the summary of the discussions, published Wednesday.
The bank cut interest rates seven consecutive times in 2024 and early 2025, before hitting pause in April.
“Others highlighted that further monetary policy support would likely be needed given the estimated amount and persistence of slack in the economy, particularly if the labour market softened further,” the summary says.
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The bank has explicitly left the door open to further interest rate cuts, saying that more rate relief could be in the pipeline if the economic growth stalls and unemployment rises while inflation remains contained. But it has not committed to anything.
Financial markets put the odds of another rate cut in September at around 30 per cent, according to LSEG data. Markets are betting on only one more quarter-point rate cut before the end of the year, although a number of Bay Street analysts are looking for two to three cuts before year end.
U.S. President Donald Trump’s erratic trade policy has made it difficult to assess where the Canadian economy is headed and what the correct stance of monetary policy should be.
Trade wars are a type of supply shock that both pushes up prices and slows down economic activity. That pulls central bankers in different directions, forcing them to choose between lowering borrowing costs to cushion the economy, and holding rates steady to prevent price jumps from morphing into persistent inflation.
The summary reiterates that the Canadian economy has held up better than central bank economists expected, helped by a surge in exports in the first quarter and tariff carve-outs that have allowed most Canadian goods to continue trading tariff free. But that could change as tariff front-running goes into reverse in the second quarter, and uncertainty weighs on business investment and consumer spending.
On inflation – the central bank’s main guidepost – the summary notes that recent core inflation readings have come in slightly hot.
Headline consumer price index inflation was only 1.9 per cent in June, although that number was pulled lower by the one-time removal of federal carbon pricing this spring. Core inflation measures, by contrast, are running around 3 per cent, while the bank thinks “underlying inflation” is around 2.5 per cent.
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But the summary also suggests that the bank’s outlook for inflation remains relatively benign, possibly bolstering the case for another rate cut.
“They noted that the impact of tariffs on consumer prices appeared to be modest so far. They also noted that wage increases and unit labour costs had continued to ease and the recent appreciation of the Canadian dollar had reduced import prices. There were no signs that inflation expectations had become de-anchored,” the summary says.
The central bank, instead of publishing its usual forecast last month in its quarterly Monetary Policy Report, decided to outline three possible paths for the Canadian economy that depend on the state of U.S.-Canada trade negotiations.
If the status quo on tariffs is maintained, the Canadian economy would likely avoid a recession and inflation would remain around the bank’s 2-per-cent target, the bank estimated. If the trade war escalated, Canada could be in for a recession while inflation would tick higher, according to the projection.
“In all three scenarios, inflation would remain within the band, with headline inflation peaking in the escalation scenario at around 2.5 per cent,” the summary says.
“While this provided some reassurance that price pressures would be contained, members judged the risks to inflation to be elevated given evident pressures on underlying inflation and the uncertainty around the impacts that tariffs and trade disruptions could have on Canada’s economy over time.”
Statistics Canada will publish July inflation numbers next Tuesday. The next Bank of Canada interest rate decision will be announced on Sept. 17.