The bank, which has kept its rate at 2.25 per cent since last October, said the Middle East conflict would drive up gasoline prices and boost inflation in the short term.

“It is too early to assess the impact of the war on growth in Canada,” Macklem told reporters, saying the risk of higher energy prices quickly spreading to the prices of other goods and services looked contained for the moment.

“Governing Council will look through the war’s immediate impact on inflation but if energy prices stay high, we will not let their effects broaden and become persistent inflation,” he told reporters.

Before the war started, the inflation rate in Canada had hovered around the central bank’s two per cent target for several months with the bank’s monetary policy stance seen as moderately stimulating a weak economy.

Iran war likely to affect forecasts

Economists say high energy prices are likely to affect forecasts for inflation and growth if the Strait of Hormuz, responsible for a fifth of global oil trade, stays closed beyond a few weeks.

Money markets, which had been expecting the bank to sit on the sidelines in 2026, firmed their bets for a rate hike in December.

The Canadian dollar weakened after the rates announcement and was trading down 0.20 per cent to C$1.3717 or 72.90 U.S. cents.

“Economic weakness combined with rising inflation is a dilemma for central banks,” said Macklem.

“Raising interest rates to slow inflation could further weaken the economy. Easing interest rates to support growth risks pushing inflation well above target.”

Macklem said near-term Canadian growth was likely to be weaker than the bank had forecast in January and described uncertainty as acute.

Canada is also dealing with U.S. tariffs on some critical sectors, subdued business investment, a soft labor market and a lack of clarity on the future of a free trade deal between the U.S., Mexico and Canada.

“Canada’s economy is dealing with a lot, and now we face more volatility,” he said.

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In a quarterly monetary policy report, the central bank maintained its forecast for modest growth in 2026 and 2027 and said inflation would hover around the two per cent target.

Wednesday’s decision was the second time in a row the bank has stayed on the sidelines. Businesses will take time to adjust to the effect of U.S. tariffs, it said, noting that hiring intentions remain soft.

“While Council judges the current policy rate is appropriate based on our outlook, the consensus was that elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate,” Macklem said in his opening remarks after the rate announcement.

Hard to predict next moves

Economists and markets are divided on where monetary policy is headed this year.

Many economists expect there could be another cut to support an economy grappling with President Donald Trump’s tariffs. Money markets though are pricing in no cuts through 2026, but bets tilt toward a hike in the last quarter.

“Geopolitical risks are elevated and the upcoming review of the Canada-United States-Mexico Agreement is an important risk to the outlook,” Macklem said.

Money market bets did not change much after the rates decision was announced.

The Canadian dollar firmed after the decision with the loonie trading up 0.28 per cent to C$1.3535 against the U.S. dollar, or 73.88 U.S. cents.

Canada’s economy has held up relatively well amid tariffs on critical sectors such a steel, autos and aluminum.

Growth in 2025 higher than expected

The bank says 2025 growth was 1.7 per cent, up from the earlier projection of 1.2 per cent in October.

The growth outlook for 2026 remains 1.1 per cent, while 2027 was revised a notch down to 1.5 per cent from 1.6 per cent projected last year.

Macklem reiterated that the risks to inflation going up due to tariffs would likely be offset by a downward pressure on prices due to excess supply.

Household spending is expected to continue growing modestly, supported by past rate cut and rising disposable incomes, Macklem said, adding that the central bank expected modest strengthening in business investment.

The BoC expressed hope that the restructuring the economy was going through due to tariffs would support some recovery in productive capacity.

“But it will all take time,” Macklem said.

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Despite tariffs between 25 per cent and 50 per cent on some critical sectors such as cars, lumber, aluminum and steel, Canada’s economy has shown signs of strength.

Third quarter annualized GDP grew by 2.6 per cent, much more than expected, while employment data showed the economy added 181,000 new jobs between September and November.

“So far, the economy is proving resilient,” Macklem said in opening remarks to reporters, adding that inflationary pressures continue to be contained. Overall inflation is just above the bank’s two per ent target.

“Governing Council sees the current policy rate at about the right level to keep inflation close to two per cent while helping the economy,” said Macklem.

GDP growth expected to be weak

Uncertainty remains high and if the outlook changes, the bank is ready to respond, Macklem said, reiterating comments he made when the bank cut rates in October to their current level.

The U.S. Federal Reserve will also announce a rate decision on Wednesday and a majority of economists expect it will cut rates by 25 basis points.

Macklem said even though the economy had shown some resilience, he expected GDP growth to be weak in the fourth quarter and hiring intentions to be muted.

While the economy is adjusting to tariffs, volatility in trade and quarterly GDP numbers are making it more difficult to assess the underlying momentum of the economy, Macklem noted.

The recent data has “not changed our view that GDP will expand at a moderate pace in 2026 and inflation will remain close to target.”

Andrew Kelvin, Head of Canadian and Global Rates Strategy at TD Securities called the bank’s commentary a fairly cautious tone.

“It leads me to be very comfortable with the idea that the bank will be on hold for quite some time,” he said.

Choppiness in inflation

The consumer price index eased to 2.2 per cent in October but economists have regularly flagged that measures of core inflation, which strips out volatile components, have stayed around three per cent, the top end of the BoC’s inflation target.

In the months ahead, the BoC expects some choppiness in headline inflation which would push inflation temporarily higher in the near term.

But Macklem said the ongoing economic slack would roughly offset these cost pressures. He said the bank expects the growth in final domestic demand to resume after registering a flat growth in the third quarter.

The Canadian dollar weakened after the announcement and was trading down 0.13 per cent to 1.3865 to the U.S. dollar, or 72.12 U.S. cents. Yields on the two-year government bonds fell 3.3 basis points to 2.556 per cent.

— Additional reporting by Nivedita Balu and Fergal Smith

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In his first observations on Trump’s efforts to influence Fed decision making, Macklem said the impact could be seen on the U.S. dollar.

In the last few months, Trump has cranked up his demands for a rate cut, tried to remove one of the Fed’s governors and repeatedly insisted that Chair Jerome Powell resign at a time when the U.S. president’s trade actions have disrupted the global trade order.

“Why I’m talking about it is that it’s starting to have consequences in financial markets,” Macklem said when asked by reporters about the timing of his comments.

“I do think you are starting to see some impacts, and in that sense, it’s time to talk about it.”

Greenback’s ‘safe haven’ role questioned

Earlier in the day, Macklem told the Saskatoon Chamber of Commerce that Trump’s attempts to influence the Federal Reserve were raising questions about the continued independence of U.S. monetary policy.

He also noted how the U.S. dollar was suffering due to Trump’s actions and accompanying global uncertainty.

“The question now is whether U.S. dominance in global financial flows will ebb as the United States pulls back from trade and runs large fiscal deficits. The recent performance of the U.S. dollar may be telling us something,” Macklem said.

The greenback, he noted, was losing its appeal, falling almost 10 per cent since Trump unleashed a barrage of tariffs globally in April. This, Macklem said, had called the dollar’s safe-haven role into question.

“For now, the greenback remains dominant, and — without a clear alternative — I suspect it will remain the global reserve currency for the foreseeable future. But for many, its value as a hedge in times of stress has been dented,” he said.

He later commended Fed Chair Jerome Powell for “doing a very good job under very trying circumstances,” but stressed the need for the Fed to remain free of political pressure.

“Central banks that have operational independence for monetary policy do a better job at delivering price stability for their citizens,” he said.

Canada ramifications

Macklem said the shifting trade equation with the U.S. had immense ramifications for Canada.

“We can’t afford to wait this out,” he said, adding that Canadian businesses as well as political and economic leaders would need to chart a new course.

“We should have been making these changes 15 years ago. But the next best time is now,” he said.

Canada has long suffered from anemic productivity, which economists and businesses say is helping fuel inflation.

Canada’s economy will work less efficiently, costs will go up and incomes will shrink due to increased trade friction with the U.S., he said, but noted monetary policy would not be able to soften these impacts.

“Monetary policy cannot undo the efficiency costs of U.S. tariffs… nor can counter-cyclical fiscal stimulus,” he said.

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Industry Minister Melanie Joly told reporters in Toronto that aid designed to help aluminum companies overcome uncertainties caused by the tariffs would be rolled out in the coming days.

Why it matters: Chinese tariffs on Canadian canola are expected to halt shipments of the oilseed to China, a vital market for Canadian farmers.

Joly also said Ottawa would help the steel sector pivot away from U.S. markets, but did not give details.

Separately, the office of Prime Minister Mark Carney said the government would shortly announce measures to help canola farmers, who have been hit by Chinese tariffs against the oilseed crop.

The iPolitics news service, citing sources, said the government was preparing to make a series of major announcements on Friday, focusing on economic and industrial competitiveness. Carney’s office declined to comment.

Canada is still hoping for relief from U.S. tariffs on steel, aluminum, and autos, and work to have the measures lifted is continuing, the federal minister in charge of bilateral trade said earlier on Thursday.

Dominic LeBlanc, speaking to reporters in Toronto, said Canada was seeking common ground with Washington on the matter.

— Reporting by David Ljunggren and Promit Mukherjee.

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Trump, who had set an August 1 deadline for an agreement, signed an executive order increasing tariffs on Canadian goods to 35 per cent from 25 per cent on all products not covered by the Canada-U.S.-Mexico trade agreement (CUSMA).

Most agricultural goods are exempt from tariffs under CUSMA.

Prime Minister Mark Carney insisted on the talks to reset bilateral relations, saying Trump’s tariffs have upended decades-old trading and security ties. The negotiations, though, have so far produced little.

Although over 90 per cent of Canadian exports enter the United States without duties, the tariffs apply to crucial sectors such as steel, aluminum and automobiles.

Canada will only accept a good deal: LeBlanc

Federal cabinet minister Dominic LeBlanc, in charge of U.S. trade relations, said Canada had always made clear it would only accept a good deal.

“At the end of business yesterday that agreement was not yet in sight … there remain sectors the Americans are targeting which are essential for the Canadian economy,” he told public broadcaster Radio-Canada.

“Over the coming weeks we will … continue talks with the Americans in an attempt to find a deal that would put us in a better position.”

Separately, LeBlanc told reporters in Washington that he would speak to U.S. Commerce Secretary Howard Lutnick next week and hoped to meet him in August.

“The doors aren’t closed, the doors are open, the conversations are ongoing,” he said.

The White House cited what it said was Canada’s failure to stop fentanyl smuggling and address U.S. concerns about trade barriers.

Washington is also unhappy about Canada’s refusal to drop its own countermeasures, which were first imposed by former Prime Minister Justin Trudeau. He resigned in March to be replaced by Carney, who won an April election promising to stand up to Trump.

In June, Carney had threatened to ramp up counter tariffs in July unless there was progress on the deal. A statement he issued on Friday did not mention retaliation.

Brian Clow, who was in charge of U.S. relations inside Trudeau’s office for several years, noted Trump had announced deals with nations that declined to impose counter tariffs.

“Unfortunately, Canada stands on its own right now, along with China, because many other countries … refused to stand up to this President,” he said by phone. “So I’m not sure that further retaliation is the way to go.”

Divided approaches

Carney’s talk about standing up to Trump cannot hide the divisions between those advocating for a hard line and those who worry about the potential economic damage.

Goldy Hyder, president of the Business Council of Canada lobby group, said Canada was struggling at the talks and urged a new approach.

“As someone said to me, Canada is playing chess, but there’s nobody playing chess with it at the other end,” he said.

“We’ve got to make sure that we are thinking through: ‘What have we been doing and what do we need to do?’,” he told CBC News. “We’ve got to move with greater urgency, because our own economy is very fragile.”

—Updated Aug. 1 at 4:07 pm

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But for the second consecutive quarter, the central bank declined to give detailed forecasts for the Canadian economy, citing the uncertainty around U.S. trade policy.

Why it matters: The Bank of Canada says the risk of a severe, escalating global trade war has diminished.

The bank also said that if the economy weakened further it could cut rates, provided upward pressures on inflation were kept in check.

Although Canada faces tariffs on three sectors, the overall effects have been contained. The economy has weakened only slightly, job growth is robust and closely-tracked metrics of core inflation are firm.

“Canada’s economy is showing some resilience so far… inflation is close to our two per cent target, but we see evidence of underlying inflation pressures,” said Governor Tiff Macklem.

The situation could change on August 1, the deadline for the United States and Canada to reach a trade deal and the date when U.S. President Donald Trump has threatened to impose 35 per cent tariffs on some Canadian goods.

The BoC aggressively eased rates by 225 basis points starting in June last year, but since March has paused as it waits to assess the impact of tariffs on the economy and prices.

“Since April, the risk of a severe and escalating global trade conflict has diminished,” the bank said in its quarterly monetary policy report. “Nevertheless, how U.S. trade policy will unfold remains highly uncertain.”

Three economic scenarios

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

The first scenario assumes existing tariffs on steel, aluminum, automobiles and on goods not compliant with a continental free trade pact will be maintained, GDP contracts by 1.5 per cent in the second quarter of 2025 and rises by one per cent in the second half before reaching 1.8 per cent in 2027, while total inflation stays close to two per cent over the next two years.

The other scenarios look at the impact should tariffs around the world decrease or increase.

In the de-escalation scenario, lower tariffs improve the growth outlook and reduce the direct cost pressures on inflation while in the opposite scenario, higher tariffs weaken the economy and increase direct cost pressures, Macklem said.

“We will be following tariff developments closely and assessing indicators of underlying inflation,” he said, adding that the central bank would continue to support economic growth while ensuring inflation was controlled.

“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,” he said.

Money markets assume a more than 81 per cent chance of another hold in interest rates in September and do not expect any more cuts this year.

“The Bank appears to be getting a little more comfortable with the notion that the Canadian economy will need the support from further interest rate cuts in the future,” Andrew Grantham, senior economist at CIBC Capital Markets wrote in a note.

“It is clearly not there yet and upcoming data will remain more important,” he added.

The Canadian dollar weakened after the monetary policy report and traded down 0.30 per cent to 1.3811 to the U.S. dollar, or 72.41 U.S. cents.

— Additional reporting by Fergal Smith, Nivedita Balue and Anna Mehler Paperny.

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Washington | Reuters—U.S. President Donald Trump abruptly cut off trade talks with Canada on Friday over its tax targeting U.S. technology firms, saying that it was a “blatant attack” and that he would set a new tariff rate on Canadian goods within the next week.

The move plunges U.S.-Canada relations back into chaos after a period of relative calm that included a cordial G7 meeting in mid-June where Trump and Canadian Prime Minister Mark Carney agreed to wrap up a new economic agreement within 30 days.

It also came just hours after U.S. Treasury Secretary Scott Bessent struck an upbeat tone on trade, touting progress had been made with China on reviving the flow of critical minerals for the U.S. manufacturing sector and in other key tariff negotiations.

The often-chaotic rollout of Trump’s import levies since his return to office this year has frequently whipsawed financial markets, and have begun to weigh on consumer spending, the bedrock of the U.S. economy.

U.S. stocks were briefly batted lower by his broadside against Canada, but the S&P 500 and Nasdaq managed to close out the week at record highs.

Trump’s action comes ahead of Canada’s plans to begin collecting on Monday a previously enacted digital services tax on U.S. technology firms, including Amazon, Meta, Alphabet’s Google and Apple, among others.

The tax is three per cent of the digital services revenue a firm takes in from Canadian users above $20 million in a calendar year, and payments will be retroactive to 2022.

Trump, in a post on his Truth Social media platform, called the tax “a direct and blatant attack on our country” and said Canada was a “very difficult country to TRADE with.”

“Based on this egregious Tax, we are hereby terminating ALL discussions on Trade with Canada, effective immediately,” Trump said. “We will let Canada know the Tariff that they will be paying to do business with the United States of America within the next seven-day period.”

Speaking to reporters at the White House, Trump said that the negotiations with Canada would not resume “until they straighten out their act,” adding that the U.S. holds “such power over Canada.”

Canada is the second-largest U.S. trading partner after Mexico, and the largest buyer of U.S exports. It bought $349.4 billion (C$478.0 billion) of U.S. goods last year and exported $412.7 billion (C$564.6 billion) to the U.S., according to U.S. Census Bureau data.

Carney’s office responded to Trump’s announcement by saying: “The Canadian government will continue to engage in these complex negotiations with the United States in the best interests of Canadian workers and businesses.”

Bessent sought to downplay the U.S.-Canadian dispute in a CNBC interview, saying U.S. Trade Representative Jamieson Greer would likely open a Section 301 probe into Canada’s digital tax that would clear the way for tariff retaliation in the amount of harm to U.S. firms, which he said was roughly $2 billion.

The U.S. has prepared similar retaliation against European countries that have imposed digital taxes. A USTR spokesperson did not immediately respond to a request for comment.

‘Wrapped up by Labour Day’

Earlier on Friday, Bessent said the Trump administration’s various trade deals with other countries could be done by the Sept. 1 Labour Day holiday, citing talks with 18 top trade partners and another revision to a deal with China to reopen the flow of rare earth minerals and magnets.

After a week where tariffs took a back seat to the U.S. strike on Iran’s nuclear facilities and the massive tax and spending bill in the U.S. Congress, the Trump administration’s trade negotiations have picked up.

The United States sent a new proposal to the European Union on Thursday and India sent a delegation to Washington for more talks.

“So we have countries approaching us with very good deals,” Bessent said on Fox Business Network.

“We have 18 important trading partners. … If we can ink 10 or 12 of the important 18, there are another important 20 relationships, then I think we could have trade wrapped up by Labour Day,” Bessent said.

He did not mention any changes to a July 9 deadline for countries to reach deals with the United States or see tariffs spike higher, but Trump said at the White House that he could extend the tariff deadline or “make it shorter.”

Trump said that he would notify countries of their tariff rates within the next week and a half, adding: “I’d like to just send letters out to everybody: Congratulations. You’re paying 25 per cent.”

New U.S.-China export revisions

Bessent said the United States and China had resolved issues surrounding shipments of Chinese rare earth minerals and magnets to the U.S., further modifying a deal reached in May in Geneva.

As part of its retaliation against new U.S. tariffs, China suspended exports of a wide range of critical minerals and magnets, upending supply chains central to automakers, aerospace manufacturers, semiconductor companies and military contractors around the world.

During U.S.-China talks in May in Geneva, Beijing committed to removing the measures imposed since April 2, but those critical materials were not moving as fast as agreed, Bessent said, so the U.S. put countermeasures in place.

“I am confident now that … as agreed, the magnets will flow,” Bessent said, adding that these materials would go to U.S. firms that had received them previously on a regular basis. He later said that the U.S. would begin shipping withheld materials to China when the rare earths shipments resumed.

China’s Commerce Ministry said on Friday the two countries have confirmed details on the framework of implementing the Geneva trade talks consensus. It said China will approve export applications of controlled items in accordance with the law. It did not mention rare earths.

Trump administration officials also held trade talks on Friday with India and Japan, two other countries in advanced negotiations with the U.S.

The Japanese government said in a statement that the two sides will continue to work to “reach an agreement that benefits both Japan and the United States.”

–Reporting by David Lawder, Susan Heavey and Doina Chiacu in Washington, Promit Mukherjee and David Ljunggren in Ottawa, Nathan Layne in New York and Manoj Kumar in New Delhi.

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Relations have been poor for almost two years but there was no sign of tension when Prime Minister Mark Carney warmly welcomed Indian counterpart Narendra Modi to the Group of Seven summit he is chairing in Alberta.

Why it matters: Canadian farmers hope to export more agricultural products, including lentils, to India.

Both men issued statements saying the talks had gone well. Carney’s office said they agreed to appoint new envoys to replace the ones both nations had withdrawn as the crisis grew.

India denied Canada’s allegations of involvement in the murder, and both nations are looking to shore up global partnerships as trade tensions and wars are recasting long-standing alliances.

Carney – who says he invited India, which is not a G7 member, due to its importance in global supply chains – told Modi it was “my great honor to have you here.”

The two men “reaffirmed the importance of Canada-India ties, based upon mutual respect, the rule of law, and a commitment to the principle of sovereignty and territorial integrity,” Carney’s office said in a statement.

Carney did not mention the furor sparked when Trudeau accused India’s government of involvement in the murder of Hardeep Singh Nijjar on Canadian soil.

Modi’s government has denied involvement in the killing and accused Canada of providing a safe haven for Sikh separatists.

“Had an excellent meeting … India and Canada are connected by a strong belief in democracy, freedom and rule of law,” Modi said on X during his first visit to Canada in a decade.

India is Canada’s top source of temporary foreign workers and international students, as well as an important market.

Greg Cherewyk, president of the Pulse Canada industry group, said Canadian farmers hope to export more agricultural products to the world’s most populous nation, including lentils.

Canada’s Sikh community, the largest outside the Indian state of Punjab, has voiced outrage over Modi’s visit, saying Canada should have set conditions before inviting him. A few dozen Sikh protesters in downtown Calgary tore apart Indian flags in protest on Tuesday.

Last year, Canada expelled six Indian diplomats, linking them to Nijjar’s murder and alleging a broader government effort to target Indian dissidents in Canada. Four men have been charged with his murder.

— Additional reporting by Matt McKnight and Evan Garcia

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The overall inflation rate fell from 2.3 per cent in March after the removal of a federal consumer carbon tax, Statistics Canada said on Tuesday.

Analysts had forecast the annual rate would ease to 1.6 per cent while the Bank of Canada last month predicted it would fall to about 1.5 per cent, mainly due to the removal of the carbon tax and lower crude prices.

Effect of tariffs difficult to predict

After seven consecutive cuts since last June the Bank held rates on April 16 while saying it would be ready to move decisively if needed to keep inflation under control.

The bank – which is due to unveil its next rate decision on June 4 – says the effect of U.S. tariffs is hard to predict, while noting the measures in place are already hurting the Canadian economy.

The bank pays particular attention to the core measures of inflation, which strip out the prices of more volatile items and do not take into account the removal of the carbon tax.

CPI median, which shows the median inflation rate across CPI components, rose from 2.8 per cent in March to 3.2 per cent in April, the highest since March 2024.

CPI trim, which excludes upside and downside outliers, edged up from 2.9 per cent to 3.1 per cent, also a 13-month high.

“Signs of renewed weakening in the economy on one hand … but stronger core inflation on the other makes for a tough decision for the Bank of Canada,” said Andrew Grantham, senior economist at CIBC Capital Markets.

Odds for rate cut dip

The odds for a rate cut dipped to 40 per cent from 65 per cent before the release, currency swap market bets showed.

Overall energy prices plunged 12.7 per cent last month from April 2024 as gasoline prices fell by 18.1 per cent from a year earlier, while year-over-year prices for natural gas dropped 14.1 per cent.

Consumers, though, paid 3.8 per cent more for groceries than they had done a year previously, up from 3.2 per cent in March. Year over year, prices for travel tours rose 6.7 per cent in April.

On a month-by-month basis, inflation dipped by 0.1 per cent compared to analysts’ forecasts of a 0.2 per cent drop.

Andrew Kelvin, head of Canadian and global rates strategy at TD Securities, said the data right now did not suggest the bank needed to cut rates.

“But obviously the significant uncertainty around trade tensions would be supportive of additional fiscal signals, so it creates a very difficult balance,” he said.

The Canadian dollar strengthened 0.1 per cent to C$1.3930 to the U.S. dollar, or 71.79 U.S. cents.

The inflation figures were the penultimate major release before the June 4 rate announcement. Statscan is due to publish first quarter GDP figures on May 30.

— Additional reporting by Fergal Smith and Nivedita Balu in Toronto

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