BoC set to hold rates steady in July – but cuts are likely ahead

The mortgage industry is keeping a close eye on the Bank of Canada's next decision on interest rates, scheduled to take place this Wednesdy (July 30). But market watchers hoping for a cut are likely to be disappointed, with the Bank likely to maintain its overnight interest rate at 2.75% for a third consecutive time, according to a Reuters poll conducted between July 21 and 25.

The anticipated pause would follow a recent uptick in inflation, steady job growth, and ongoing concerns about potential US tariffs that continue to cloud the country’s economic outlook.

A pause after rapid easing

Since June 2024, the central bank has lowered rates by a total of 225 basis points to support economic activity. However, that easing cycle has been on hold since March. Economists point to “a confusing barrage of US tariff threats” as a primary reason for the pause, Reuters reported. With more than 80% of Canadian exports heading to the United States, the threat of additional duties on key goods such as steel and automobiles has heightened uncertainty for businesses.

Most recently, US president Donald Trump suggested a 35% tariff on goods not covered under existing trade deals, further complicating the outlook. As a result, all 28 economists surveyed expect the Bank of Canada to keep rates unchanged this month.

Further cuts still on the table

Despite the projected hold, economists foresee further easing later this year. Eighteen of the 28 respondents expect a 25-basis point cut in September, bringing the benchmark rate to 2.50%. Seventeen forecast at least two cuts before the end of 2025, and five anticipate a total of three reductions.

Driving these expectations are concerns about continued economic softness. After growing at a 2.2% annualized pace in the first quarter, Canada’s economy shrank by 0.1% in April and is expected to have contracted 0.5% in the second quarter. Nearly half of economists predict a technical recession—defined as two consecutive quarters of contraction—will materialize this year.

Businesses remain hesitant to hire or invest, and the housing market continues to underperform despite the sharp decline in interest rates since last year.

Inflation remains stubborn

Inflation rose to 1.9% last month and is projected to average around 2% through at least 2027. However, core inflation indicators remain elevated. Core CPI trim held steady at 3%, while CPI median rose to 3.1% in June, according to a report from Financial Post. The three-month annualized rate—a key measure for the Bank—climbed to a six-month high of 3.5%.

Doug Porter, chief economist at BMO Capital Markets, described the major measures of core inflation, as "stubbornly stuck right around 3%" and highlighted shelter costs and tariffs on imported goods like vehicles and furniture as primary drivers. 

All eyes are now on the Bank’s upcoming statement for clues on its path forward.

CMP

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