BOC holds rate at 2.25%, highlights tariff and energy risks

Macklem's opening statement to the press conference is as follows:

Good morning. I’m pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today’s monetary policy decision.

Since our last decision in July, the conflict in the Middle East has persisted without a clear path to resolution. Closer to home, the United States has imposed new tariffs on Canadian exports, and the Canadian government has responded with proportionate counter-tariffs and new supports for hard-hit businesses and workers.

Against this background, the Governing Council assessed the economic data since our last decision, the evolving risks to the outlook, and the implications for monetary policy.

With recent data coming out largely in line with our July forecast, we decided to maintain the policy interest rate at 2.25%.

We have three main messages.

First, economic growth in Canada has picked up after stalling over the past year. That puts us on a stronger footing as we face new challenges. But uncertainty about the sustainability of the rebound has increased with new US trade actions.

Second, the ongoing conflict in the Middle East is keeping energy prices higher for longer, and this has increased the upside risks to the outlook for inflation.

Third, the Bank of Canada is committed to keeping inflation close to the 2% target over time. We will be a source of stability as Canadians navigate shifting global developments.

Let me expand.

As expected, the economy strengthened in the second quarter, with GDP up by 3.3% following very weak growth in the first quarter. Some of the strength was due to temporary factors, but the pick-up in activity was broad based. Consumer spending remained resilient. And following several weak quarters, there was some rebound in housing activity. Exports and business investment were up sharply. The labour market has also improved in recent months, with increased hiring by the private sector and the unemployment rate edging down to 6.4% in July. Still, recent indicators point to continued excess supply in the economy. 

The increases in exports, investment and hiring are broadly consistent with what businesses have told us—they are adapting to tariffs, new technology and increased uncertainty. Overall, the data reaffirm our view of a broadening recovery.

However, new US tariffs and increased trade uncertainty pose risks to the sustainability of the rebound in economic activity. If the tariffs remain in place, they will hit targeted sectors hard. But we don’t expect them to have a large direct impact on the overall level of economic activity. Affected products represent about 5% of exports to the United States. And the federal government’s support programs will likely mitigate some of the harm. However, the situation remains fluid. The added uncertainty about the future of Canada-US trade relations may lead businesses more broadly to delay investment and hiring decisions.

CPI inflation has remained at around 3% in recent months, mainly because of persistently high gasoline prices. This is a direct result of the conflict in Iran, which has kept global oil prices high and has led to elevated margins for refined products like gasoline and diesel. Excluding gasoline, inflation in Canada was 2.2% in July and measures of core inflation have remained close to 2%.

Market expectations for oil prices have shifted up since July. The Bank has been looking through the direct impact of higher oil prices on inflation, but we’re monitoring closely for any signs that they are spreading to the prices of other goods and services. We haven’t seen much evidence of that yet. But with the conflict ongoing and shipments through the Strait of Hormuz still curtailed, upside risks to our inflation forecast have increased. The longer oil prices and refinery margins stay high, the greater the risk that higher energy prices spill over and turn into persistent inflation. In addition, the new US tariffs and the Canadian counter-tariffs could add costs for some businesses and feed into consumer prices over time.

Monetary policy cannot offset the effects of tariffs or influence global energy prices. What we can do is ensure global developments don’t jeopardize price stability in Canada.

Since our last decision, inflation and growth in Canada have evolved broadly as forecast. Against that background we decided to leave the policy rate unchanged. However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain. Governing Council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed. The Bank remains committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.

With that, the Senior Deputy Governor and I are pleased to take your questions.

The statement is summarized by topic below.

Policy decision:

• The Governing Council maintained the policy rate at 2.25%, noting that growth and inflation have followed the July forecast.
• The Bank is ready to change policy if needed to achieve the 2% inflation target.

Economic recovery:

• Second-quarter GDP rose 3.3% following a weak first quarter. While temporary factors contributed, the recovery has become more widespread.
• Consumer spending stayed strong, the housing market picked up, and both exports and business investment saw sharp increases.
• The private sector added jobs, bringing the unemployment rate down to 6.4% in July.
• Even with this improvement, the economy still has spare capacity.

US tariffs and growth risks:

• The new US tariffs undermine the recovery's durability and will severely affect specific industries.
• The targeted goods represent roughly 5% of Canada's exports to the US, so the direct macroeconomic effect is expected to be limited.
• Federal support programs will likely mitigate some of the harm, but heightened trade uncertainty may cause businesses to postpone investment and hiring.

Inflation:

• Headline inflation is still near 3%, driven mainly by high gasoline prices.
• Stripping out gasoline, inflation stood at 2.2% in July, and core inflation measures stayed near the 2% target.
• So far, there is scant evidence that energy costs are spilling over into other goods and services.

Energy and upside inflation risks:

• The ongoing Middle East conflict and reduced shipments via the Strait of Hormuz are sustaining high oil prices and refining margins.
• The longer these pressures continue, the higher the risk that inflation becomes more entrenched.
• Additionally, the US tariffs and Canada's retaliatory tariffs could increase costs for businesses and, over time, feed into consumer prices.

The overall tone of the statement is a cautious hold with a modest hawkish tilt.

• Macklem explicitly pointed to greater upside risks to inflation while acknowledging that the growth outlook has become more uncertain.
• Nevertheless, core inflation around 2%, persistent excess supply, and little evidence of energy spillovers suggest the comments should not be read as a clear sign of an imminent rate increase.

Macklem's overarching message is that Canada's economy is strengthening, but tariffs pose a threat to growth while high energy prices pose a threat to inflation. This leaves the Bank of Canada balancing two competing risks.

To understand the currency implications, it is important to recall how USDCAD moves. USDCAD rises when the Canadian dollar weakens, meaning it takes more Canadian dollars to buy one US dollar. USDCAD falls when the Canadian dollar strengthens.

• USDCAD rises: The Canadian dollar weakens; it takes more Canadian dollars to buy one US dollar.
• USDCAD falls: The Canadian dollar strengthens; it takes fewer Canadian dollars to buy one US dollar.

The currency implications outlined below are interpretations of the governor's comments, not a description of actual market moves.

1. Keeping the policy rate at 2.25%: A wait-and-see stance.

The policy rate affects borrowing costs throughout the economy. Lower rates tend to boost borrowing and spending, while higher rates curb spending and help contain inflation.

By keeping rates unchanged, Macklem indicated that the economy does not require further stimulus from lower rates, nor does inflation warrant a rate increase at this point.

Currency implication: A rate hold that was widely expected typically offers little new direction. The key is whether the comments alter expectations for the next move. If expectations for cuts diminish, the Canadian dollar could strengthen, pushing USDCAD lower, all else being equal. The relative outlook for Canadian versus US rates is particularly significant.

2. The economic recovery: Canada is on firmer ground.

Consumer spending, housing activity, and business investment and exports have all improved, pointing to a more widespread recovery.

However, some of the strength came from temporary factors, so the Bank wants to see if the improvement persists.

Currency implication: A sustained recovery would generally support the Canadian dollar by reducing the need for rate cuts and making Canada more attractive to investors, which would favour a lower USDCAD. A recovery that fades would have the opposite effect.

3. “Excess supply”: The economy still has room to grow.

This means Canada has workers and business capacity that are not fully utilized, limiting pressure on wages and prices.

Currency implication: This reduces the urgency to raise rates, offsetting some of the positive currency message from stronger growth. If spare capacity persists alongside weaker activity, it could weigh on the Canadian dollar.

4. Tariffs: A threat to Canadian sales and confidence.

US tariffs make affected Canadian products more expensive for American buyers, hurting Canadian exporters' sales and profits.

Macklem noted that the directly affected products represent about 5% of exports to the US. The bigger concern is that broader uncertainty may cause businesses to postpone expansion or hiring.

Currency implication: This is generally negative for the Canadian dollar. Weaker exports and investment could slow growth and increase pressure for rate cuts, favouring a higher USDCAD. However, tariffs can also raise prices, complicating the Bank's ability to cut.

5. Inflation near 3%: Gasoline is doing much of the damage.

Headline inflation measures the overall change in consumer prices, while core measures help assess underlying inflation by excluding volatile items.

Macklem's point is that gasoline is keeping the overall number high, while inflation elsewhere looks much closer to the 2% target.

Currency implication: A 3% headline reading alone does not necessarily mean higher rates are coming. With core inflation near 2%, the Bank has room to wait. The more important question is whether price increases become widespread.

6. Persistent energy costs: The risk of inflation spreading.

Higher fuel costs can eventually work their way into delivery charges, airfares, food, and other products. Macklem said there is little evidence of broad spillovers yet, but the risk is increasing.

Currency implication: If traders expect those spillovers to keep Canadian rates higher for longer, the Canadian dollar could strengthen and USDCAD could fall. The expected central-bank response matters more than inflation itself.

7. Higher oil prices: Helpful for exports, costly elsewhere.

Canada exports oil, so higher prices can increase export revenues and support the Canadian dollar. But Canadian households and businesses also pay more for fuel. Oil is only one part of the currency story, and broader US dollar moves and other economic forces can outweigh it. Bank of Canada research

Currency implication: Higher oil prices can support the Canadian dollar, but they do not guarantee a lower USDCAD, particularly when trade uncertainty is also hurting Canada's outlook.

My reading is a modestly hawkish hold—meaning the Bank sounds somewhat more concerned about inflation and less comfortable cutting rates. That offers potential support for the Canadian dollar, but the tariff risks temper it. If traders focus on persistent inflation and fewer cuts, USDCAD could move lower. If they focus on damage to growth, it could move higher. These comments suggest directional pressures, not a specific exchange-rate target.

What has happened? The USDCAD moved lower after the decision and broke below the next key target at the 100-hour moving average and the 38.2% retracement of the move from the end of July high at 1.3882. That break is considered more bearish. Next targets are the 200-hour moving average at 1.3857 and the 200-day moving average at 1.38393. Earlier in the day, the price rose above its 100-day moving average at 1.39179 but ran into trendline resistance near 1.3940. The move back below the 100-day moving average set the stage for the rate decision, which pushed prices lower.