Why the Bank of Canada could be done cutting its policy rate for now

OTTAWA — The Bank of Canada has largely kept to the sidelines as it tries to get a sense of how U.S. tariffs will impact the economy — and some economists think it might just stay there.

After a quarter-point cut in March, the central bank held its benchmark interest rate steady at 2.75 per cent in April and June.

With last month’s jobs figures showing a surprise gain and core inflation levels holding steady at around three per cent, economists now broadly expect the central bank will continue its holding pattern at its next decision on July 30.

The central bank lowers its policy rate when it wants to encourage spending and boost the economy but keeps borrowing costs elevated when there are concerns inflation could pick up steam.

Most economists expect the Bank of Canada will deliver at least one or two more quarter-point cuts in the months ahead.

Lower rates would help shore up the economy in the trade war, the argument goes.

RBC is among a small group making the case for no more interest rate cuts from the Bank of Canada for the time being.

Frances Donald, RBC’s chief economist, said the central bank could opt to cut again amid “pockets” of weakness in the economy — a soft housing market and a sharp slowdown in tariff-struck sectors like manufacturing, to name a few.

“On the flip side,” she said in an interview, “it’s worth considering, would Bank of Canada rate cuts actually help what’s hurting the Canadian economy?”

The policy rate is a broad tool that affects every Canadian — and every market — regardless of their need for support, Donald noted.

That means that tariff-sensitive Windsor, Ont., where the unemployment rate now tops 11 per cent, would see the same stimulus from a rate cut as Victoria, B.C., where the jobless rate currently sits at just 3.9 per cent.

“Rate cuts would probably be inappropriate in an economy like that,” Donald said.

Instead, RBC argues that markets like Windsor need the precision of fiscal policy support from the government.

The Bank of Canada has already delivered 2.25 percentage points of interest rate cuts over the past year, and that support is only now starting to filter into the economy, Donald said.

The central bank can now hand the baton to the federal government without having to provide much more support for the economy, she said, unless signs of a broader downturn start to materialize.

Donald said RBC has a more optimistic view of the economy than some other forecasters, expecting growth to pick up through the rest of the year thanks to resilient consumer spending and an expected rebound in business confidence.

But Oxford Economics, which expects Canada is already in a recession that will persist through the rest of the year, also expects no further interest rate cuts from the central bank.

The firm said in an updated outlook this week that while it expects job losses to pick up steam in the months ahead, it also sees inflation rising to three per cent by mid-2026 thanks to tariffs and related supply-chain strain.

The Bank of Canada will want to lean against any potential rise in prices and will keep its policy rate on hold even as the trade war stymies growth, Oxford Economics argued.

Donald said that after inflation surged over the pandemic, consumers are likely feeling “scarred” as new price pressures bubble up around them.

“Canadians have been through a very serious affordability crisis and this is a Bank of Canada that’s likely going to lean on the side of wanting to prevent a second round,” she said.

BMO, meanwhile, has three more interest rate cuts in its forecast currently, with the final coming in March of next year.

But BMO chief economist Doug Porter acknowledged the arguments are growing for fewer, if any, cuts.

“If you look at what the financial markets are expecting, and they’re often a very good judge, at this point they’re really only looking for one more cut,” he said in an interview after Tuesday’s inflation release.

Porter said the federal government is expected to rapidly ramp up spending, particularly on defence and infrastructure, in the coming months, taking some of the pressure off the Bank of Canada to cut rates.

Stephen Brown, deputy chief North America economist at Capital Economics, believes it’s not reasonable to expect the central bank is done cutting with the unemployment rate holding near seven per cent and the economy’s output well below potential.

“I think it’s quite unlikely that we’re in a position where the economy doesn’t need any cuts at all,” he said.

At 2.75 per cent, the Bank of Canada’s benchmark interest rate is at the middle of its so-called “neutral range,” where monetary policy is neither boosting nor stifling economic growth.

Brown said he expects the policy rate will likely drop to 2.25 per cent before the central bank’s easing cycle is done, giving the economy some tailwinds through the trade uncertainty.

Donald believes the Bank of Canada is well positioned at the middle of its neutral range — able to pivot lower with a couple of interest rate cuts as needed or keep rates elevated if inflation proves stubborn in the months ahead.

She said she doesn’t expect interest rate hikes will be in the cards anytime soon, but argues the Bank of Canada maintains overall flexibility by keeping its policy rate on hold until the data tells it which way to move.

“They could choose to stay at this level for the next one to two years waiting for the next shock, which could go in one direction or the next.”

This report by The Canadian Press was first published July 19, 2025.

Craig Lord, The Canadian Press