The Bank of Canada announced today that it would hold its target for the overnight lending rate steady at 2.75%. This marks the third consecutive announcement where the Bank has opted to maintain the current interest rate, following previous holds in June and April 2025.

While certain aspects of U.S. trade policy have begun to solidify, negotiations remain ongoing, and the potential for new tariffs persists. Despite these external pressures, the Canadian economy continues to demonstrate resilience with real GDP growing 0.5% in the first quarter of 2025 and nominal GDP reaching $3.17 trillion CAD on a seasonally adjusted annual rate.

"At this rate decision, there was a clear consensus to keep our policy rate unchanged. We also agreed on the need to proceed cautiously, paying close attention to the risks and uncertainties facing the Canadian economy. These include: the degree to which higher US tariffs diminish demand for Canadian exports; the extent to which this impacts business investment, employment, and household spending; the speed and magnitude of cost increases from tariffs and trade disruptions being passed on to consumer prices; and the evolution of inflation expectations," stated Tiff Macklem, Governor of the Bank of Canada, during a press conference following the announcement.

Macklem added, "If a weakening economy further suppresses inflation and the upward price pressures from trade disruptions remain contained, a reduction in the policy interest rate may become necessary."

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Economic Indicators Show Mixed Signals

Canada's Consumer Price Index (CPI) increased by 1.9% year-over-year in June, a rise from 1.7% in May. This increase was partially attributed to stronger price growth in durable goods, particularly passenger vehicles which saw prices accelerate to 5.2% from 4.9% in the previous month, and furniture prices which jumped to 3.3% from just 0.1%.

The unemployment rate declined to 6.9% in June, down 0.1 percentage point from 7.0% in May, though this represents a significant increase from the 6.0% rate recorded a year earlier. Total employment reached 21.061 million in June, up from 20.978 million in the previous month, according to Statistics Canada.

Labor market fundamentals remain concerning, with employment declining for two consecutive months earlier in the year and the unemployment rate up almost 1 percentage point from year-ago levels. Real GDP per capita managed a modest 0.2% increase in the first quarter, while business labor productivity posted its largest quarterly gain at 0.6% in four quarters.

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Trade and Current Account Performance

Canada's current account balance improved to -$2.127 billion in Q1 2025 from -$3.560 billion in the previous quarter. The balance of goods deficit widened slightly to -$470 million from -$330 million, while exports of goods and services reached $1.064 trillion CAD on an annualized basis, up from $1.022 trillion in Q4 2024.

The Bank noted that the effective U.S. tariff rate on Canadian goods currently stands at approximately 7-8%, representing an increase of 5 percentage points from the start of 2025. However, CUSMA exemptions continue to allow the vast majority of Canadian exports to enter the U.S. duty-free.

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Housing Market Sees Rebound After Slow Spring

The Canadian housing market experienced a slower spring than usual in 2025. However, as consumer confidence improved towards the end of the second quarter, market activity began to increase. The stability in interest rates may help to further boost sales momentum as the fall market approaches.

According to a report released earlier in July, the aggregate price of a home in Canada edged upwards modestly in the second quarter of 2025, increasing 0.3% year-over-year to $826,400. On a quarter-over-quarter basis, the national aggregate home price decreased by 0.4%.

Housing starts and building permits data show continued resilience in the construction sector, with residential building completions maintaining steady levels despite broader economic uncertainty.

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Core Inflation Measures Signal Persistent Pressures

While headline inflation remains below the Bank's 2% target, underlying inflation measures continue to show persistence. The Bank's preferred trimmed-mean core CPI held steady at 3.0%, well above the target range. Private sector economists forecast CPI inflation for 2025 ranging from 1.8% to 2.7%, reflecting the significant uncertainty around tariff impacts.

Producer prices also showed upward momentum, with the Producer Price Index reaching 130.1 in June, up from 129.6 in the previous month, indicating building cost pressures in the pipeline.

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Business and Consumer Sentiment

Recent Business Outlook Survey results from the second quarter of 2025 showed improved business confidence, with companies reporting better outlooks compared to the sharp deterioration seen in March. Consumer confidence, while still below historical averages, has also shown signs of stabilization after earlier steep declines.

Manufacturing activity remains soft due to ongoing trade disruptions, but the sector showed resilience with industrial production maintaining relatively stable levels. Capacity utilization rates have held steady at approximately 80%, suggesting businesses are maintaining operational flexibility despite uncertainty.

"In a widely anticipated move, the Bank of Canada has once again maintained its overnight lending rate. This decision highlights the delicate balance that our central bank must maintain. While domestic inflation trends are generally under control, the assertive and often unpredictable trade policies of the United States are creating significant challenges for Canadian policymakers," commented one industry expert. "By holding the current rate, the Bank is signaling a cautious and measured approach in response to global economic volatility and the approaching August 1st deadline for a new Canada-U.S. trade agreement."

The expert added, "For Canadians, today's decision provides a degree of certainty. For real estate markets, it is likely that more people who need to upgrade their housing situation will decide that they can no longer wait, which will spur activity as we head into the fall. Economic fundamentals, including strong employment and improved affordability, are supporting conditions for growth in the housing market, along with substantial pent-up demand."

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Looking Ahead

The Bank of Canada's next interest rate announcement is scheduled for Wednesday, September 17th. Market participants will be closely watching for updated economic projections and guidance on the future path of monetary policy, particularly as trade negotiations continue and the August 1st deadline for enhanced Canada-U.S. trade arrangements approaches.

Key metrics to monitor include monthly GDP data for May and June, which are expected to show some volatility due to wildfire impacts on oil production in Alberta and continued trade-related disruptions in manufacturing sectors.

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Aggregate prices are calculated using a weighted average of the median values of all housing types collected. Data is provided by RPS Real Property Solutions and includes both resale and new build.