Bank of Canada Holds Steady, But Cracks Are Beginning to Show

The Bank of Canada has kept its policy rate steady at 2.75 per cent, a decision that was understandable given the recent resilience of Canada's economic performance. However, despite some positive indicators, cracks are emerging that suggest the economy's strong showing may not last. The bank's core inflation measures have remained elevated, and underlying upward pressure on inflation is evident. Meanwhile, business investment is weakening, consumer confidence is worsening, and exports have fallen significantly. As these factors come into play, the likelihood of further rate cuts increases.

Key Takeaways:

• The Bank of Canada's preferred measures of core inflation have remained elevated, stubbornly sitting around 3 per cent since the beginning of the year.
• GDP growth has continued to surprise on the upside, with the first quarter of 2025 seeing a 2.2 per cent growth rate, significantly outpacing the bank's 1.8-per-cent forecast.
• More than 80,000 jobs were created in June, but the gains were dominated by part-time jobs, which increased by 70,000.
• The Business Outlook Survey by the Bank of Canada suggests that businesses are placing less weight on the worst-case scenario for the tariff situation, but uncertainty is still driving their decisions relative to hiring and investment.
• Exports have fallen 27 per cent since their peak in January, and trade deal or not, exports are likely to continue struggling.
• The core inflation measures have been poor predictors of inflation over the past year, and their divergence from headline inflation is a cause for concern.
• Business investment is weakening, consumer confidence is worsening, and the economy's strong showing may not last.

Statistics:

• The Bank of Canada's policy rate remains at 2.75 per cent.
• Core inflation measures have remained elevated, sitting around 3 per cent since the beginning of 2025.
• GDP growth in the first quarter of 2025 was 2.2 per cent, significantly outpacing the bank's 1.8-per-cent forecast.
• More than 80,000 jobs were created in June, with part-time jobs increasing by 70,000.
• Exports have fallen 27 per cent since their peak in January.
• The divergence between headline inflation (1.9 per cent in June) and the two core measures is more than a full percentage point.

Sources:

• Bank of Canada, "Monetary Policy Report, Summer 2025"
• Bank of Canada, "Business Outlook Survey, Summer 2025"
• Statistics Canada, "Labour Force Survey, June 2025"