Bank of Canada holds rates, warns of renewed trade risks

The Bank of Canada (BoC) kept its policy rate unchanged at 2.25%, in line with market expectations. In its opening statement, the central bank said the ongoing conflict in the Middle East and the breakdown in trade talks between Canada and the United States had kept economic uncertainty elevated.

The BoC acknowledged that the Canadian economy grew faster than expected in the second quarter, supported by firm domestic demand and a rebound in exports. However, renewed trade uncertainty is expected to continue weighing on business and consumer confidence, while the economy still has excess supply.

On inflation, the Bank said headline CPI inflation had moved somewhat higher in recent months to around 3%, largely reflecting the impact of higher energy prices. Underlying price pressures, however, remained broadly contained. The Bank warned that upside risks to its inflation outlook had increased amid stalled progress in the Middle East and new U.S. tariffs and Canadian counter-tariffs.

The Governing Council said the current policy rate remained appropriate given the balance of risks facing the economy. It reiterated that monetary policy was well positioned to respond if conditions materially changed and that it was prepared to adjust policy as needed.

Financial markets interpreted the statement as slightly hawkish. Canadian two-year bond yields rose by a few basis points, while the Canadian dollar strengthened by around 0.3% against the U.S. dollar. Markets also modestly increased expectations for a 25-basis-point rate hike by year-end, with the probability rising to around 65% from 60% before the announcement