This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on July 30, 2025.
This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations.
Governing Council’s policy decision-making meetings began on July 22, 2025. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent, Rhys Mendes and Michelle Alexopoulos.
International economy
Governing Council members began their deliberations by discussing global economic developments. As in June, the focus of the discussion was ongoing tariffs and trade negotiations between the United States and other countries. Some important trade agreements had been announced, notably with Japan and the European Union, and the risk of an escalating and protracted global trade war had diminished. While uncertainty was still very high, it was clear that the United States is no longer willing to engage in free and open trade. Members discussed the implications of this shift for economic growth going forward as trade is reconfigured and companies adjust to new trading relationships.
Members agreed that, so far, the global economy had shown more resilience to the trade turmoil than had been expected. Data at the time of the deliberations showed that in the United States, domestic demand was being held up by a solid labour market, investment related to artificial intelligence, and a recovery in equity markets. However, US growth had been moderating—household spending had slowed with greater uncertainty about trade policy weighing on consumer confidence. China’s growth had also slowed, although higher exports to other countries compensated for lower exports to the United States. Growth in the euro area had moderated, reflecting slower growth in domestic demand.
Members discussed recent financial conditions, which had recovered strongly since the turmoil in April. They noted that equity and other risk asset prices were back up to levels seen at the beginning of the year, apparently responding to markets’ assessments that tariffs and their impacts would be less severe than anticipated. Longer-term government bond yields were also up in many countries because of high current and anticipated sovereign debt issuance and revised expectations about the degree of monetary policy easing. The Canadian dollar had strengthened against the US dollar but weakened against other currencies.
Canadian economy and inflation outlook
Canada’s economy appeared to have contracted in the second quarter of 2025 following robust growth in the first quarter. Both exports and inventories contributed strongly to first-quarter growth as businesses rushed to ship or receive goods before tariffs were imposed. Much of that pull-forward in activity was unwound in the second quarter, resulting in a sharp drop in exports. Overall consumption and government spending appears to have increased, while business and residential investment appear to have declined. The weaker economic activity resulted in more excess supply in the economy.
There was some discussion about how persistent the effects of uncertainty would be on investment and consumption. Members agreed that, so far, the Canadian economy overall had shown some resilience. Business and consumer confidence had shown some improvement in recent surveys, although they remained low.
Governing Council members agreed that the labour market remained soft. Job losses were concentrated in sectors that are reliant on trade. Employment had continued to grow in the rest of the economy. While job growth had picked up in June, the unemployment rate was 6.9%, with some categories, such as youth unemployment, markedly higher since the beginning of the year. Some members expressed concern about the risks of further increases in the unemployment rate and the implications for households if the trade conflict were to escalate or the effects were to spread through the economy more broadly.
Governing Council had agreed to forego a conventional forecast for growth and inflation in the Bank’s July Monetary Policy Report (MPR) in order to capture the high level of uncertainty surrounding US trade policy—what tariffs and countermeasures will be imposed, how long tariffs will last, and how trade negotiations will play out. Instead, the MPR presented three scenarios:
- The current tariff scenario outlined how growth and inflation would evolve if the current tariff levels in place or agreed as of July 27 were to remain in place and the trade agreements recently announced were to be implemented. Under that scenario, economic growth resumes in the third quarter and inflation remains around 2%.
- A de-escalation scenario explored the implications of lower US tariffs and the reduction or removal of counter-tariffs. In that scenario, growth rebounds and inflation is below 2%.
- The escalation scenario examined the implications of a significant increase in tariffs. Under that scenario, the economy falls into recession and inflation rises to around 2½% next year.
Governing Council members agreed that these three scenarios encompass a wide range of potential outcomes. Members also considered a second layer of trade-related uncertainty: how households, businesses and governments will react and adapt to tariffs.
Discussions about different indicators of inflationary pressures, and the trajectory for headline inflation, occupied much of the deliberations. Consumer price index (CPI) inflation was 1.9% in June, pulled down by the removal of the consumer carbon tax in April (the effect of this removal will continue to be reflected in the CPI data through March 2026). Excluding indirect taxes, CPI inflation was 2.5% in June, up from about 2% in the second half of 2024. CPI inflation excluding indirect taxes was being held up by high inflation in prices for shelter services. Inflation excluding indirect taxes had been rising steadily as prices for non-energy goods increased, partly due to temporary factors such as the past depreciation of the Canadian dollar. This rise in non-energy goods prices had more than offset a continued easing of inflation in shelter services.
Based on a range of indicators, members assessed underlying inflation to be around 2½% recently, up from around 2% in the second half of last year. Measures of core inflation ranged between 2.5% and 3.0% in June. The distribution of inflation rates across CPI components had shifted up, with more rising above 3% and fewer below 1%.
Bank surveys conducted since April indicated that businesses’ inflation expectations had diminished slightly after rising in the first quarter, while consumers’ expectations had not come down.
Governing Council members discussed the outlook for inflation. They noted that the impact of tariffs on consumer prices appeared to be modest so far. They also noted that wage increases and unit labour costs had continued to ease and the recent appreciation of the Canadian dollar had reduced import prices. There were no signs that inflation expectations had become de-anchored. Moreover, none of the three tariff scenarios suggested a sharp rise in inflation.
Members also examined the possibility that the recent strength in non-energy goods price inflation could persist. The direct cost impacts of tariffs and counter-tariffs on consumer prices had only just begun to be evident in the data. And additional costs faced by businesses as they seek new suppliers and develop new markets could add further upward pressure to consumer prices. More generally, the fundamental rewiring of the global trading system could be inflationary for some time.
Members agreed that the degree of firmness in underlying inflation was an important consideration for the policy decision.
Considerations for monetary policy
As they weighed the current stance and path of monetary policy, Governing Council members discussed the risks and uncertainties facing the Canadian economy.
US trade policy had become somewhat more concrete in the weeks leading up to the deliberations, but US tariff rates had increased substantially since President Trump took office and the uncertainty around trade seemed likely to endure. Even for the agreements in place, details were yet to be finalized, durability was not assured and new product-specific tariffs were still being threatened. At the time of deliberations, a trade deal between Canada and the United States was still being negotiated. Members agreed that the three scenarios presented in the MPR provided a useful framework for assessing the impacts of different tariff scenarios on the Canadian economy.
The three scenarios presented a range of outcomes for Canadian economic growth. In all three scenarios, inflation would remain within the band, with headline inflation peaking in the escalation scenario at around 2½%. While this provided some reassurance that price pressures would be contained, members judged the risks to inflation to be elevated given evident pressures on underlying inflation and the uncertainty around the impacts that tariffs and trade disruptions could have on Canada’s economy over time.
The second layer of uncertainty—how households, businesses and governments will react and adapt to tariffs—was the focus of considerable discussion among members of Governing Council. They assessed how the four key indicators they were watching had evolved.
First, data on exports over recent months clearly showed a sharp drop that reflected both the payback for the pull-forward of trade activity in previous months, and lower US demand for Canadian exports as a result of tariffs. In the current tariff scenario, exports would stabilize in the second half of the year before growing again in 2026, albeit on a lower path than their pre-tariff trajectory. The shape of a future agreement on trade between the United States and Canada would determine how much the demand for Canada’s exports would be affected. In particular, new sectoral tariffs could be imposed, reducing Canada’s exports and raising costs further.
Second, members agreed that the spillovers from lower export demand into business investment, employment and household spending had been limited so far. Members noted that consumer confidence, while still low, had improved and become less of a drag on consumption and housing activity. They also discussed the extent to which spending by all levels of government could partially offset the weakness in sectors affected by tariffs.
Third, members agreed it was too early to tell how much and how quickly cost increases from tariffs and trade disruptions would be passed on to consumer prices. Members acknowledged that these costs are difficult to evaluate and could add upward pressure to consumer prices over time. Whether these upward pressures will be counterbalanced by the downward pressures from easing growth in unit labour costs and excess supply in the economy will require ongoing assessment.
Fourth, members noted that recent survey data on inflation expectations showed longer-term consumer and business expectations to be well anchored. However, given uncertainty about how much costs could increase and what future pass-through to consumer prices could be, members agreed to continue to watch the evolution of inflation expectations closely.
Overall, members agreed that it was still too early to assess how tariffs and the rewiring of trade would affect economic activity and inflation in Canada.
Against this backdrop, members discussed the appropriate role for monetary policy in the context of a shock that affects both supply and demand. They agreed that US trade actions were a structural shock to the global and Canadian economies. Monetary policy works to control inflation by influencing demand and is not well suited to shocks that push prices up because of a decline in aggregate supply. In this context, there was some debate about what monetary policy could do to support the economy through this period of upheaval.
Some members held the view that, having reduced the policy interest rate to the middle of the Bank’s estimated range of the neutral interest rate, and the economy showing some resilience to US tariffs, the Bank may have already provided sufficient support to aid in this transition. Businesses and consumers were adapting, and growth in sectors of the economy less tied to US trade actions could support the overall economy, albeit on a lower path of economic activity. Given the lagged effects of monetary policy, there was a risk that further easing might take effect only as demand was recovering, which could add to price pressures.
Others highlighted that further monetary policy support would likely be needed given the estimated amount and persistence of slack in the economy, particularly if the labour market softened further. If incoming data showed that the upside risks to underlying inflation were not materializing, there could be more room for monetary policy to ease further, reducing economic slack and supporting the economy’s adjustment to the reconfiguration of global trade.
Given the uncertainty around estimates of slack and underlying inflation, and how households, businesses and governments will adapt to tariffs, members agreed they would need to wait for more clarity before drawing firm conclusions. Members agreed it was important to emphasize that the unusual degree of uncertainty meant that they needed to be looking over a shorter horizon than usual in their monetary policy deliberations.
Finally, regarding monetary policy operations, Governing Council members noted that settlement balances had continued to come down. This had not created sustained pressures on the Canadian Overnight Repo Rate Average (CORRA). As previously announced, term repo operations were ramping up and settlement balances were on track to settle in a range of approximately $50 billion to $70 billion.
Policy decision
Members discussed the appropriate stance for monetary policy at this time, given the risks and uncertainties affecting the economy and inflation. They discussed two options: maintaining the policy interest rate at 2.75% or reducing it by 25 basis points.
Governing Council’s deliberations focused on three main factors. First, the amount of uncertainty around US trade policy was still elevated. Second, despite an expected contraction of economic activity in the second quarter due to the drop in exports following the pull-forward, the Canadian economy was showing some resilience so far. Third, underlying inflationary pressures remained, and there continued to be risks to inflation from trade disruptions and tariffs.
Based on these factors, Governing Council decided to maintain the policy interest rate at 2.75%.
Governing Council members also discussed the future path for interest rates. At their previous meeting, members had agreed that if a weakening economy put further downward pressure on inflation and the upward price pressures from the trade disruptions were contained, there may be a need for a reduction in the policy interest rate. Members were aligned on the importance of reiterating this view in their communications at this decision.
Given the clouded outlook, Governing Council members agreed to proceed carefully, with particular attention to the risks.