BoC officials considered whether interest rate already low enough to weather tariffs
The Bank of Canada Deliberates on Interest Rates Amid U.S. Tariffs
Recently released documents reveal that some members of the Bank of Canada were questioning whether the current benchmark interest rate is adequate to support the Canadian economy in the face of U.S. tariffs. The central bank held its policy rate steady at 2.75 per cent in late July, with discussions focused on how tariffs and global trade disruptions were impacting inflation and the broader economy.
The decision came just days before U.S. President Donald Trump increased tariffs on Canadian goods to 35 per cent, while still exempting goods compliant with CUSMA. Despite the uncertainty, policymakers noted signs of economic resilience leading up to the rate decision.
Some members of the governing council debated whether the Bank of Canada had already provided enough support to navigate the tariff transition. The central bank had cut its policy rate seven times between 2024 and March of this year to stimulate the economy and control inflation. Economists suggest that the effects of monetary policy changes often take a year or more to fully impact the economy.
Concerns were raised about the potential for further rate cuts to fuel inflation down the road if the economy recovered on its own. While some forecasters do not anticipate additional rate cuts, others believe that signs of economic slack may warrant further easing, especially if the labor market weakens.
The Bank of Canada considered three scenarios for the U.S. tariff situation: status quo, de-escalation, and escalation. None of these scenarios indicated a significant increase in inflation, with policymakers noting that the impact on consumer prices has been modest thus far.
As the central bank prepares for its upcoming interest rate decision in September, it will closely monitor inflation data for July and August. Despite the uncertainties surrounding tariffs and trade disruptions, the Bank of Canada remains vigilant in its efforts to support the Canadian economy through these challenging times.
