Policymakers at
continue to debate how monetary policy can best support the
during a period of global trade uncertainty, according to deliberations released on Wednesday.
Some members of the governing council said there should not be any further rate relief, given the Canadian economy has shown more resilience and further easing could exacerbate pricing pressures.
“Businesses and consumers were adapting, and growth in sectors of the economy less tied to U.S. trade actions could support the overall economy, albeit on a lower path of economic activity,” the summary said. “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.”
Others, however, said further rate relief is needed given the persistent slack in the Canadian economy and a risk that the labour market could deteriorate further.
“If incoming data showed that the upside risks to underlying inflation were not materializing, there could be more room for monetary policy to ease further, reducing economic slack and supporting the economy’s adjustment to the reconfiguration of global trade,” the summary said.
The deliberations were from Bank of Canada meetings that took place from July 22 until the July 30 rate decision, when the central bank opted to hold its policy rate at 2.75 per cent for the third straight time.
Bank of Canada governor Tiff Macklem
said the hold was due to three main reasons: ongoing trade uncertainty with the United States, a more resilient Canadian economy and evidence of underlying inflation pressures.
First-quarter
(GDP) growth came in better than expected at 2.2 per cent, mainly due to businesses pulling forward inventory to beat tariff announcements. The central bank expects negative growth in the second quarter, but early Statistics Canada estimates suggest the second quarter is on track to avoid a contraction.
The unemployment rate has been 6.9 per cent in June and July, with layoffs still contained, but there has been very little net employment growth since the beginning of this year.
Macklem left the door open for further rate relief if “a weakening economy puts further downward pressure on inflation and the upward price pressures from trade disruptions are contained.”
Policymakers acknowledged the persistence of underlying inflation and that tariff-related impacts on prices were only just beginning, but they also said there were “no signs that inflation expectations had become de-anchored.”
Measures of core inflation have hovered around three per cent since April, but uncertainty remains on how inflation will evolve in response to tariff-related disruptions.
Due to this uncertainty, the central bank decided not to publish a forecast in its most recent monetary policy report. Instead, it presented three scenarios: the first used
in place as of July 27, the second represented a de-escalation in tariffs and the third showed an escalation in U.S. tariff rates.
The first scenario expects growth to contract in the second quarter before returning to one per cent in the third quarter, as exports stabilize and household spending strengthens. Growth then picks up in 2026 and reaches 1.8 per cent in 2027.
In the de-escalation scenario, GDP grows around two per cent in the second half of 2025 and averages 1.7 per cent through the end of 2027. Inflation stays below the two per cent target until late 2026.
In the escalation scenario, GDP contracts for the remainder of 2025, with growth slowly picking up in the first half of next year. Headline inflation rises to just above 2.5 per cent by the third quarter of 2026.
“Given the uncertainty around estimates of slack and underlying inflation, and how households, businesses and governments will adapt to tariffs, members agreed they would need to wait for more clarity before drawing firm conclusions,” the summary said.
• Email: jgowling@postmedia.com