PROMIT MUKHERJEE and DAVID LJUNGGREN

OTTAWA (Reuters) – The Bank of Canada (BOC), as expected, maintained its main key rate on Wednesday at 2.75%, for the third consecutive time, while noting that the risk of aggravation of the world war in the world had decreased.

However, the central bank has refrained from providing detailed forecasts on the evolution of the Canadian economy for the second consecutive quarter, citing uncertainty around American commercial policy.

The BOC also indicated that if the economy was still weakening, it could reduce its guiding rates, but the upward pressures should also be controlled.

Even if Canada is faced with customs duties in three sectors, the overall effects have been contained. The economy has only slightly weakened, the growth in employment is robust and the indicators of basic inflation, followed closely by the BOC, are firm.

“In this context where uncertainty remains high, the Canadian economy shows a certain resilience, and where pressure on underlying inflation remain, the board of management has decided to leave the guidance rate unchanged,” the BOC wrote in its monetary policy press release.

“Even if inflation is almost 2%, underlying inflation has increased,” continues the BOC.

Since June 2024, the BOC has clearly reduced its guiding rates, by 225 base points, before deciding on a break since March 2025. It opted for this status quo because it is waiting to assess the impact of customs duties on the economy and prices.

The situation in Canada could change on August 1, a deadline that Washington and Ottawa must conclude a trade agreement and while US President Donald Trump threatened to impose customs duties of 35% on certain Canadian products.

“Since April, the risk of a serious and growing global trade conflict has decreased,” said the bank in its quarterly report on monetary policy. “Nevertheless, the evolution of American trade policy remains very uncertain,” she added.

Three scenarios

Rather than issuing forecasts, the bank presented three different scenarios.

The first scenario assumes that current customs duties on steel, aluminum, automobile and goods that are not in accordance with ALENA (North American free trade agreement) would be maintained, that GDP would contract 1.5% in the second quarter 2025 and would rebound 1% in the second half before reaching 1.8% in 2027, while would remain close to 2% in the next two years.

The other scenarios look at the impact of a drop or an increase in customs duties in the world.

In the scenario of an de -escalation, the drop in customs duties would improve growth prospects and reduce the pressures of direct costs on inflation, while in the opposite hypothesis, the increase in surcharge would weaken the economy and increase the pressures of direct costs, explained Tiff Macklem, the governor of the BOC.

“We will closely follow the evolution of customs duties and assess the indicators of underlying inflation,” he said, adding that the Central Bank would continue to support economic growth while ensuring that inflation is controlled.

“If the weakening of the economy exerts new downward pressures on inflation and upward pressures on prices linked to commercial disturbances are contained, a reduction in the key interest rate may prove necessary,” he said.

The probability of a new maintenance of guiding rates at their current level in September is currently estimated at more than 81% by the money markets, which do not provide other drops in borrowing costs this year.

“The bank seems to be a little more comfortable with the idea that the Canadian economy will need the support of new dropping rate drops in the future,” wrote in a note Andrew Grantham, economist at CIBC Capital Markets.

“We are clearly there yet and the data to come will remain greater,” he added.

The Canadian dollar was weakened after the BOC monetary policy decision, posting a decline of 0.30% to 1.3811 for an American dollar.

(Report report Mukherjee and David Ljunggren; Claude Chendjou, edited by Kate Entringer)

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