Introduction to the Bank of Canada’s Decision
The Bank of Canada recently released documents showing that some members were questioning whether the central bank’s benchmark interest rate was low enough to support the Canadian economy through U.S. tariffs. This decision came after the bank held its policy rate steady at 2.75% on July 30.
The Bank of Canada’s Governing Council Deliberations
The summary of deliberations from the meetings leading up to the decision show that the central bank’s governing council was focused on how U.S. tariffs and the global trade "rewiring" were affecting inflation and the wider Canadian economy. The council considered a quarter-point cut at the July meeting, in addition to the rate hold. The decision arrived just before U.S. President Donald Trump increased base tariffs on Canada to 35%, while maintaining an exemption for goods compliant with CUSMA.
Economic Resilience and Uncertainty
Despite the ongoing uncertainty, monetary policymakers noted some signs of economic resilience heading into the rate decision. The deliberations show that some members wondered if the Bank of Canada had already provided "sufficient support" to guide the economy through its tariff transition. The central bank had cut its policy rate seven consecutive times from June 2024 to March of this year to boost the economy as inflation showed signs of coming back under control.
The Impact of Monetary Policy
Economists say that the impact of a monetary policy decision tends to take effect a year or more after the move, so many of those rate cuts are just now starting to stimulate the economy. The Bank of Canada’s governing council wondered whether cutting rates now, only for the economy to recover on its own, would end up fueling inflation down the road. "Given the lagged effects of monetary policy, there was a risk that further easing might take effect only as demand was recovering, which could add to price pressures," the summary read.
Forecasters’ Outlooks
Some forecasters, including RBC, have no further interest rate cuts in their base-case outlooks. Others on the Bank of Canada’s governing council felt that signs of slack emerging in the economy could warrant additional cuts, particularly if the labor market started showing more weakness. If incoming data showed inflation wasn’t straying too far from the central bank’s target of two percent, there could be a need for a lower policy rate, those members argued in the deliberations.
Division Among Governing Council
Randall Bartlett, deputy chief economist at Desjardins, said that the fact that the central bank considered a rate cut at its most recent meeting suggests the governing council is leaning toward further easing. Desjardins expects the central bank will be in a position to lower its policy rate at its next meeting in September, with the possibility for additional cuts later in the year. Bartlett said the apparent division among the governing council just points to the lack of clarity among economic data about whether the economy needs a boost or not amid tariffs.
Scenarios for the U.S. Tariff Situation
The Bank of Canada issued three scenarios for how the U.S. tariff situation could evolve: one that saw the status quo persist, one that saw a de-escalation in trade restrictions, and another that showed tariffs ramping up. The governing council noted that none of those scenarios showed a "sharp rise in inflation" and recent surveys of consumers and businesses suggested inflation expectations remain well-anchored.
Conclusion
In conclusion, the Bank of Canada’s decision to hold its policy rate steady at 2.75% was made after careful consideration of the impact of U.S. tariffs on the Canadian economy. While some members of the governing council wondered if the central bank had already provided sufficient support to guide the economy through its tariff transition, others felt that additional cuts could be warranted if the labor market showed more weakness. The bank will get a fresh look at inflation figures for July and August ahead of its September 17 interest rate decision, which will provide more clarity on the direction of monetary policy.
