The Bank of Canada maintains its master rate at 2.75 % for the third consecutive time.
In a prepared speech, Governor Tiff Macklem stressed that, during the Council’s decision, “the consensus was clear”.
In a context of strong commercial uncertainty, the Canadian economy has not yet strongly deteriorated in the face of customs duties in the United States, and underlying inflation is a certain persistence.
The Bank of Canada lowers its key rate when it wishes to stimulate the economy, but maintains borrowing costs at a high level when it fears an increase in inflation.
Mr. Macklem specifies that the economy has shown a “certain resilience” so far, but it also opens the door to a drop in rates if growth slows more.
“If the weakening of the economy weighs with additional drop pressure on inflation and upward pressures on prices due to commercial disturbances are contained, a reduction in the key rate may be necessary,” he agrees.
While overall inflation increased by 0.2 % to 1.9 % in June, the Banque du Canada provides an underlying inflation of around 2.5 %, excluding volatility and tax changes that distort the data.
The Canadian labor market shows some weakness in the sectors exposed to customs duties, such as the manufacturing sector, but other sectors continue to create jobs.
Mr. Macklem explains that the Banque du Canada will monitor the impact of customs duties on economic activity and the demand for Canadian exports as well as the possibility that the increase in costs linked to these import rights is reflected in consumers.
The increases in customs duties are “lower than those that the American administration had threatened to apply,” notes Macklem, but they remain higher than recent historical levels. The risks of a “serious” world trade war has decreased in recent months, he adds.
Even if US President Donald Trump recently concluded trade agreements with countries like Japan and the European Union, these agreements still have customs duties.
Mr. Macklem agrees that the nature of these agreements suggest that “the United States does not consider a return to the opening of exchanges”.
Different scenarios
The Bank of Canada published a report on monetary policy in parallel with its decision on the rates on Wednesday, but this report once again included any central economic forecast, the prospects of the central bank remaining darkened by uncertainty.
Rather, the bank proposed a scenario based on maintaining the current level of customs duties, as well as two others which provide for both de -escalation and a new increase in customs duties. Each of these case studies provides at least a certain maintenance of customs duties.
Although it is difficult to obtain precise figures on the levels of customs duties given the diversity of exemptions and overlaps, the Central Bank estimates that the effective rate of American customs duties in Canada is today about 7 or 8 %, an increase of 5 percentage points compared to the beginning of the year.
Leaders in the central bank’s monetary policy also assume that the vast majority of Canadian goods will be exempt from customs duties in the coming years thanks to their compliance with the Canada-US-Mexico agreement, companies hastening to obtain their certification.
In the status quo scenario, the Bank of Canada provides for an economic recovery by the end of the year, after an estimated decrease of 1.5 % of the real gross domestic product annualized in the last quarter.
The current customs duties scenario provides for a growing real GDP of 0.5 percentage percentage point in 2025 and 2026 compared to the projections of the Bank of Canada before the Trade War, in January.
Inflation would also remain around 2 % until the end of 2027 in this scenario, the forces that push prices upwards being roughly compensated by those which slow them down.
A de -escalation scenario would halve the American customs duties on Canada, which would reduce upward pressure on inflation and promote a faster recovery in growth. Canada’s retaliatory customs duties are also removed in this example.
But an escalation of tensions would see the United States imposing a customs right of 10 % on all goods from Canada and Mexico-without taking into account current exemptions related to compliance with ACEUM-in addition to a 50 % customs threat to copper imports. Canada would then react by imposing customs duties of 25 % out of $ 120 billion in American goods, against 60 billion currently.
This climbing scenario would lead to an increase in inflation and an economic recession for the rest of 2025.
President Trump threatened to impose a customs right of 35 % on Canadian imports from Friday if no trade agreement is concluded between the two countries by then. The forecasts of the Bank of Canada do not take into account specifically the consequences of such a possibility.
