Bank of Canada holds rates steady while signaling easing bias

Summary

• The Bank of Canada (BoC) held its policy rate steady at 2.75% at today's announcement, an outcome that was widely expected, and the third straight meeting at which the central bank has left policy unchanged.

• The BoC offered a range of economic scenarios. They highlighted that while some elements of U.S. trade policy have become more concrete, trade negotiations remains fluid and uncertainty remains elevated. That said, the BoC signaled an overall bias to ease monetary policy further, saying 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."

• Given our view of slower growth and a deceleration in core inflation over time, we remain comfortable with our outlook for a further 50 bps of rate cuts. However, given the BoC's already weak growth outlook and the likelihood that core inflation will take time to ease perceptibly, we believe those rate cuts could occur later than we previously envisaged. We now expect a 25 bps rate in October, followed by a 25 bps rate cut at the BoC's first meeting of 2026, which would bring the policy rate to a low of 2.25%.

• We view current expectations for BoC easing through the rest of 2025 as reasonably fair, but believe market participants could be under-appreciating the potential for lower Canadian policy interest rates in early 2026.

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