The BoC Hits Pause - But Trade Wars Keep the Easing Bias Alive

Monetary policy enters scenario mode as tariffs, slack, and inflation risks collide

Jul 30, 2025

🔑 Executive Summary

The Bank of Canada left its policy rate unchanged at 2.75% in July - a widely expected move. But this wasn’t a quiet hold. It marked a shift in tone.

Faced with surging U.S. tariffs and unprecedented trade uncertainty, the BoC scrapped its usual forecast and instead outlined three conditional scenarios. The message: rate cuts remain firmly on the table - but depend on how trade shocks evolve and whether inflationary pass-through stays contained.

Governor Macklem emphasized that inflation is near target, but the economy is weakening, slack is rising, and businesses are shouldering higher costs. If downside risks intensify, the BoC is prepared to respond.

Markets didn’t flinch, but the central bank made its play clear: in a world this uncertain, monetary policy must remain flexible - and deeply scenario-driven.

🔍 What Just Happened?

Rate: Held at 2.75%, as expected
Guidance: Unchanged, but with sharper focus on downside growth risks
Projections? Not this time - the BoC scrapped its formal forecast, opting instead for a three-scenario framework tied to U.S. trade outcomes
Inflation: Headline CPI at 1.9%, core tracking near 2.5%
Growth: Q2 GDP likely contracted -1.5% annualized after a strong +3.1% Q1
Slack: Output gap widening; job market holding, but softening at the margins
Markets: CAD dipped modestly; no major moves - traders now pricing no further cuts in 2025
Bottom Line: The BoC isn’t ready to cut again yet - but it’s getting closer. If growth weakens further and inflation behaves, the next move is likely down.

🧠 Scenario Central: Why There’s No Forecast

This isn’t just a macro slowdown - it’s a policy fog.

With U.S. tariffs now hitting Canadian autos, aluminum, steel, and even some USMCA non-compliant goods, and with Washington conducting a formal trade review, the Bank of Canada admitted what most central banks rarely do: it can’t issue a central forecast in good faith.

So it didn’t.

Instead, the July MPR introduces a three-scenario framework - a rare step that reflects the depth of policy uncertainty:

🟡 Current Tariff Scenario (Baseline-like):

Q2 contraction is followed by tepid growth
Slack persists through mid-2027
CPI trends near 2%, as tariff-driven price hikes offset weak demand
Business investment and consumer spending stay cautious

🟢 De-escalation Scenario:

Trade tensions ease
Growth accelerates by late 2025
Inflation drops below 2%
Slack closes faster, allowing more productivity gains

🔴 Escalation Scenario:

Broader tariffs trigger a full recession into early 2026
Inflation rises above 2.5% due to import price spikes
Long-term growth potential structurally impaired
Consumer confidence and investment take a severe hit

The Bank isn’t trying to call the future. It’s showing its hand: monetary policy is now risk-adjusted and condition-based.

“It would be misleading to publish a single projection,” the MPR notes. Instead, the central bank is focused on how to react, not predict.

This is real-world monetary strategy - where uncertainty is the baseline.

🗣️ What Macklem Said

Governor Tiff Macklem struck a tone of measured readiness - signaling that the BoC remains on alert, even if it’s not in crisis mode.

Here’s what stood out:

“The economy is weak, but not sharply weaker.”
Translation: The pain is real, but not yet deep enough to trigger a cut - unless it persists.
“There may be a need for a reduction in the policy interest rate.”
The clearest verbal cue yet that further easing is possible - contingent, not promised.
“Tariffs mean the economy is going to work less efficiently... it will resume growing, but it’ll be on a permanently lower path.”
A rare acknowledgment of long-term structural scarring from trade policy.
“We will support growth while ensuring inflation remains well controlled.”
The classic central banker dual mandate - but here, tilted slightly toward growth protection.

The tone? Disciplined, flexible, and scenario-aware. This isn’t complacency, but it’s also not a panic pivot. The BoC is threading the needle between price stability and policy optionality.

📊 Markets: Waiting, Watching

The BoC’s pause triggered little immediate volatility - but markets are listening closely for the next move.

CAD/USD: Weakened slightly to ~1.3815 on the decision
Bond Yields: Flat across the curve - no repricing of forward guidance
OIS/Futures: Markets still price no additional cuts in 2025, but those odds could shift quickly on data or trade headlines
TSX: Flat intraday - the pause was fully priced in
September Odds: Swaps imply 80%+ chance of another hold

This was a textbook “as expected” decision - no surprises, no signal shift. But economists remain biased toward further easing:

💬 RBC: “The Bank retains an easing bias... but it would take a more severe trade shock to act.”
💬 BMO: “They’ve kept the door open.”
💬 TD: “They’re wisely trying to leave as many options on the table.”
💬 Capital Economics: “They’re prioritizing downside risks to growth over upside risks to inflation.”

The BoC’s next move is still likely a cut - but it’s on a hair trigger. The path depends on tariffs, growth, and inflation convergence.

⚠️ Why This Matters

Canada’s economy isn’t in freefall - but it’s increasingly cornered by external shocks it can’t control.

U.S. tariffs are biting. Export volumes are down. Businesses are absorbing higher input costs as they scramble to reconfigure supply chains. Inflation is sticky in the wrong places - and wage growth is finally cooling.

The BoC faces a rare dilemma:

Cut too soon, and it risks fueling price instability tied to tariff pass-through
Cut too late, and it risks embedding slack and choking off momentum altogether

This isn’t just about where the policy rate sits. It’s about optionality.

The Bank is buying time - and flexibility - by standing pat. But the direction of the next move is clear: down - if growth falters and imported inflation doesn’t re-accelerate.

This pause is a hedge. A deliberate one.

🥔 Potato Capital Take

This is textbook risk calibration.

The Bank of Canada isn’t cutting yet.
But it’s not pre-committing to anything either.
Scenarios are the forecast now.

The September decision will hinge on trade clarity.

From our macro lens, this is the right stance - especially with the USMCA review deadline approaching and no deal in sight with the U.S. Canada remains the only G7 country still exposed to active trade penalties.

If tariffs escalate, a rate cut becomes near-certain.
If tensions ease, the BoC can keep its powder dry.

We’re in a macro liminal zone.
And so is the central bank.