Canada's Bank set to increase interest rates tomorrow – is such a move justified?
The Bank of Canada has decided to hold its benchmark interest rate steady at 2.75% as of mid-2025, marking a pause in its previous hikes. This decision comes after careful monitoring of inflation and growth data, signalling the central bank's cautious approach.
Headline inflation has eased to about 1.9% in June 2025, but core inflation metrics, such as CPI-median and CPI-trim, remain close to 3%, indicating sticky underlying price pressures. This cautious approach is further justified by the Canadian economy's resilience, with steady consumer spending and ongoing business investment, reducing immediate pressure for rate cuts, despite slower GDP growth and some recession risks.
The Bank of Canada's decision is influenced by various factors, including trade-related uncertainties. Tariffs and their potential escalation or easing add complexity to the inflation outlook, potentially pushing prices up and influencing the Bank's future decisions.
Forecasts suggest that the Bank may hold rates steady for now. However, modest cuts within the next year remain plausible if inflation softens further and growth weakens. Deeper or rapid cuts are unlikely unless the economy deteriorates sharply.
Notable figures in the economic field, such as Stephen Gordon, a professor of business economics at l'Université Laval in Ste-Foy, Que., and Pablo Villanueva, an economic expert with Swiss Bank UBS, have voiced their opinions on the Bank's decision. While some believe the Bank could do nothing at all, others anticipate further rate reductions if economic conditions weaken significantly.
In a nutshell, the Bank of Canada has paused its interest rate hikes in 2025 due to easing headline inflation and slower growth but has not fully committed to cuts yet because of persistent core inflation and economic resiliency. The central bank maintains flexibility, with further rate cuts possible but contingent on how inflation and economic conditions evolve.
The steady consumer spending and ongoing business investment in the Canadian economy (business) could potentially influence the Bank of Canada's future decisions regarding the interest rate (finance). Despite some concerns about slower GDP growth and recession risks, the persistent core inflation (economy) further justifies the cautious approach taken by the central bank.
