MNI BoC Review-July 2025: Dour Outlook Keeps Door Open To Cuts

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The Bank of Canada held its overnight rate at 2.75% at the July meeting as widely expected. Overall the decision was taken mildly dovishly by markets, which priced in a slightly higher possibility of a rate cut by year-end.

• While Gov Macklem noted in the press conference that the situation faced by Governing Council hadn’t really changed since the June meeting, the rate decision statement cast a dovish tilt on developments since the start of the year as a whole.
• In particular, the BOC noted “The unemployment rate has moved up gradually since the beginning of the year to 6.9% in June and wage growth has continued to ease. A number of economic indicators suggest excess supply in the economy has increased since January.” Indeed Macklem highlighted that output appeared to be permanently impaired by sustained US-Canada trade tariffs.
• With the BOC emphasizing excess supply increasing, while simultaneously playing down June’s data showing a pullback in the unemployment rate and continued high core inflation, the takeaway from the initial communications leaned dovish. This was reflected in rate markets that at one point post-decision added about one-quarter’s worth of a 25bp rate cut (6bp) by year end.
• A slightly more ambiguous dovish development was the inclusion in the rate statement of "If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate” which appeared in a slightly different form in Macklem’s press conference statement in June. That appeared to ensconce the easing bias more firmly in the official communications.
• That said, overall the communications were fairly balanced, perhaps to be expected given the high degree of uncertainty. Macklem and the statement for instance noted the resilience of the Canadian economy amid US-Canada tariff conflict.
• And as Macklem reiterated, “it's hard to be as forward looking as usual when you've got an unusual amount of uncertainty”, pointing out the multiple scenarios outlined in the updated Monetary Policy Report. He said “we're going to take our decisions one decision at a time, and our future decisions are going to depend what happens in the future.”
• Overall the BOC’s concern about growth appears to keep open the possibility of a rate cut, with some analysts continuing to eye potentially as soon as September – though as before, this is likely to require some bad news in trade developments and / or in the data.