Bank of Canada Holds Overnight Rate at 2.25%

On Wednesday, the Bank of Canada (BOC) held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

With the economy and inflation evolving broadly as forecast in the July Monetary Policy Report (MPR), Governing Council agreed to leave the policy rate unchanged. However, the Bank said upside risks to inflation have increased, while new tariffs have made the outlook for economic growth more uncertain.

The BOC said the continuing conflict in the Middle East is keeping energy prices high, while new US tariffs and Canadian countermeasures have been announced following the breakdown of trade talks between Canada and the US. Financial conditions have also tightened since July, with long-term bond yields moving higher globally, including in Canada, while the Canadian dollar has appreciated slightly amid US-dollar weakness.

Canadian economic activity strengthened in Q2, with GDP rising 3.3% following very weak growth in Q1. Consumption posted solid gains, housing activity rebounded after several weak quarters, and exports and business investment rose sharply. Labor market conditions have also improved in recent months, with the unemployment rate edging down to 6.4% in July, although the BOC said demand for labor remains subdued and indicators continue to point to excess supply in the economy.

Globally, US economic growth remained solid, supported by consumer spending and AI-related investment. Growth in the euro area was stronger than expected in Q2, while China’s economy slowed. The Bank said the global economy has remained resilient despite geopolitical headwinds, with growth broadly consistent with its July MPR projection.