Canadian Central Bank Likely to Increase Interest Rates Tomorrow - Is This Justified?
The Bank of Canada (BoC) has decided to maintain its trend-setting interest rate at 2.75% in its policy meeting on July 30, 2025. This move comes after a broad consensus among economists and analysts that a steady rate is the appropriate stance at this stage.
The decision follows a series of rate hikes that began last February, with today's decision marking the eighth consecutive increase. The BoC's aim has been to combat rising inflation, with price hikes being its primary tool. However, recent data indicate that inflation is decelerating and moving towards the Bank’s target.
Inflation trends have been a significant factor in this decision. The annualized inflation rate over the previous three months has now dropped below 4 percent, compared to over three times that a year ago. Moreover, almost two-thirds of the 300-odd subcategories tracked by Statistics Canada are now in negative territory for the year, including publications, computer and electronic equipment, children's clothing, and shoes.
Economic growth and the labor market have also played a role in the BoC's decision. The Canadian economy is described as "softer but not sharply weaker," showing moderate growth. Recent data indicate a rebound in the labor market, reinforcing stability in monetary policy decisions.
Business sentiment, as reflected in the BoC’s Q2 Business Outlook Survey, has also been a consideration. Firms are cautious due to global uncertainties like US tariffs but show reduced recession fears and tentative hiring and investment plans, suggesting no immediate need to adjust rates.
The current policy rate of 2.75% falls within the Bank’s estimated neutral rate band of 2.25% to 3.25%, signaling appropriate monetary policy given existing economic conditions.
However, not all experts agree that another interest rate hike is imminent or necessary. Pablo Villanueva, an economist with Swiss Bank UBS, believes the BoC may do nothing at all. Karyne Charbonneau, a financial expert with CIBC, assumes the BoC is likely to raise interest rates again on Wednesday, but she believes there probably isn't another hike coming after that.
The bank's interest rate hikes have made borrowing money more expensive for customers and businesses. The one-in-four chance that there won't be an interest rate hike today is the first time that figure has been anything less than a certainty since the bank began hiking rates last February.
Looking ahead, the real test for inflation will be in the February numbers, as that will be one year since Russia invaded Ukraine, which accelerated inflation. The Bank of Canada's decision today on whether to raise interest rates again will be based on whether they recognize the delayed effects of what they've already done.
Investors are betting real money that the winds of monetary policy may be blowing in a different direction soon, as the probability of a hike on Wednesday is about 3/4, but there's a 1/4 chance that there won't be one. It generally takes between six months to a year and a half for the full impact of interest rate hikes to be felt.
[1] "Bank of Canada holds interest rate steady as inflation decelerates," Financial Post, July 30, 2025. [2] "BoC holds interest rate steady, but rate hikes may not be over," CBC News, July 30, 2025. [3] "The Bank of Canada's monetary policy decision: What you need to know," Globe and Mail, July 30, 2025.
- The Bank of Canada's goal in maintaining the interest rate is to strike a balance between combating inflation and supporting the economy.
- The steady interest rate decision could impact businesses and finance, as borrowing costs remain high due to previous rate hikes, and future rate changes remain uncertain.
