Introduction to Bank of Canada’s Interest Rate Decision
The Bank of Canada is expected to make a significant decision regarding interest rates on July 30. Markets are overwhelmingly expecting the Bank to hold its key interest rate at 2.75%. This decision comes amid a June rebound in the labor market, less-than-feared economic deterioration from US tariffs, and still-sticky core inflation.
Expectations from Economists
Economists expect the Bank of Canada to focus on jobs data and tariff assumptions for hints on future rate cuts. The futures market currently assigns less than a 10% chance of an interest rate cut next week and is leaning toward, but not fully pricing, a single 25-basis-point cut by year-end. The Bank last cut interest rates in March, following six consecutive cuts starting in the summer of 2024, which brought the policy rate from its peak of 5.00% to 2.75%.
Reasons for Delaying Rate Cuts
Analysts point to a significant decrease in the uncertainty stoked by US President Donald Trump’s trade war. This gives the governing council a justification to continue favoring scenario-based analysis over a clear signal through explicit forward guidance. An interest rate cut is off the table for now, with the earliest possible resumption of the easing cycle likely in September, coinciding with the potential resumption of the US Federal Reserve’s easing cycle.
Labor Market and Inflation
The labor market showed unexpected strength in June, adding 83,000 jobs as the unemployment rate dipped to 6.9% from 7.0% the month before, defying market expectations. However, core inflation remains sticky, which could influence the Bank’s decision.
Tariff Deadline and Uncertainty
US President Donald Trump has threatened a 35% tariff on Canadian exports that fall outside the terms of the United States-Mexico-Canada Agreement. Canada has until August 1 before these tariffs come into effect, with no prospect of a deadline extension. This uncertainty lingers, despite active negotiations between Ottawa and Washington, making it difficult for policymakers to fully incorporate potential second-order tariff effects into their near-term forecasts.
Bond Market and Investor Expectations
The bond market agrees that the odds of a July cut remain below 10%. Longer yields have risen modestly over June, likely reflecting the anticipation of more fiscal stimulus and/or the likelihood that any slowdown in the Canadian economy will be short-lived. However, some investors are warning that the market may be underpricing the Bank of Canada’s potential policy response through late 2025 and into early 2026.
Key Variables to Watch
Labor data and trade negotiations are the two most important variables outside of rates. Investors should watch for any commentary surrounding Canada’s labor market and tariff assumptions that underpin the Bank’s forecasts. Additionally, any reference to the housing market outlook could hold further clues.
Next Interest Rate Cut
The Bank can afford to wait and monitor developments, especially around Trump’s August 1 tariff deadline, before potentially resuming rate cuts. Some economists expect easing to resume later this year, though the odds have shifted toward a slower pace of easing. Markets are pricing about a 75% chance that the Bank of Canada cuts its policy rate once more this year.
Conclusion
In conclusion, the Bank of Canada’s decision to hold interest rates at 2.75% is widely expected. However, the path ahead still hinges on trade, and the Bank can afford to wait and monitor developments before potentially resuming rate cuts. Investors should watch for key variables such as labor data, trade negotiations, and tariff assumptions to gauge the Bank’s future policy moves. With uncertainty lingering, the Bank’s next interest rate decision will be crucial in shaping the Canadian economy’s future.
