Bank of Canada Holds Interest Rate - Jul 30, 2025

This morning, the Bank of Canada announced that it is holding its key interest rate. The prime rate remains at 4.95%. As a result, there are no payment changes for variable-rate mortgage holders.

Overview

Some parts of U.S. trade policy have become clearer, but negotiations are still changing, and new tariffs are still being threatened. Because of this uncertainty, the Bank of Canada’s July report doesn’t give a standard forecast. Instead, it outlines three possible scenarios: one with current tariffs, one where tariffs go up, and one where they go down.

Global Economy

Even though tariffs have caused some disruption, the global economy has remained fairly stable. The U.S. economy grew more slowly in early 2025, though the job market stayed strong. Inflation in the U.S. rose slightly in June as some of the tariff costs began to affect consumer prices. Other areas like Europe and China saw moderate growth, and Canada’s dollar has gained value as the U.S. dollar has weakened.

Canada’s Economy

U.S. tariffs have caused problems for Canadian trade, but the economy is still showing signs of strength. Canada’s GDP grew early in the year as exports were pushed out quickly before tariffs hit, but it likely dropped about 1.5% in the second quarter as exports fell back and U.S. demand slowed. Businesses and consumers are more cautious due to uncertainty, and job losses have occurred in some trade-affected sectors. However, other parts of the job market remain stable, and the unemployment rate reached 6.9% in June.

Growth Outlook

Under the current tariff situation, Canada's economy is expected to grow slowly in the second half of 2025, around 1%, as trade levels out and consumer spending improves. There will likely be economic slack through 2026, but that’s expected to shrink as growth approaches 2% by 2027. If tariffs are reduced, growth could recover more quickly. If they increase, the economy may continue to shrink through the rest of the year.

Inflation

Inflation in Canada reached 1.9% in June, up slightly from the previous month. When taxes are excluded, inflation rose to 2.5%, driven mostly by higher prices for goods. Shelter costs remain the biggest contributor to inflation, although they are rising more slowly than before. Looking ahead, inflation is expected to stay close to 2% though increased tariffs or supply chain costs could push prices higher.

Interest Rate Decision

Because there’s still a lot of uncertainty and inflation pressures remain, the Bank of Canada has decided to keep its interest rate steady. They are watching closely to see whether inflation falls as the economy slows, or rises due to higher trade-related costs. If inflation comes down and those cost pressures are controlled, there may be a need to lower interest rates. The Bank is moving carefully and keeping all options open.

What They’re Watching

The Bank of Canada is paying close attention to how much U.S. tariffs reduce demand for Canadian goods and how this affects jobs, spending, and business investment. They’re also watching how quickly companies pass cost increases on to consumers and how inflation expectations change. Their main goal is to keep inflation stable and help support the economy during this uncertain time. They want Canadians to continue trusting that prices will stay under control.

The next Bank of Canada announcement will be on Sep 17, 2025.

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