With inflation heating up again and economic growth stuck in neutral, the Bank of Canada looks set to play it safe this coming week—pressing pause on rate cuts, even as the broader economic outlook remains murky.
In a research update dated July 281, RBC economists Claire Fan and Abbey Xu offer a measured but revealing take on the central bank’s next steps. Their message? Don’t expect fireworks—just a cautious recalibration of expectations.
“We’re expecting the Bank of Canada to leave the overnight rate unchanged again on Wednesday…”
That opening line from Claire Fan sets the tone for everything that follows. After slashing the overnight rate by a hefty 225 basis points since June 2024, the BoC has kept things steady for two straight meetings. And come Wednesday, that streak will likely continue.
Alongside the rate decision, the Bank will release its latest Monetary Policy Report (MPR). New projections are coming—but don’t hold your breath for surprises. As Fan puts it, “We’ll be watching Wednesday’s MPR closely for new projections but don’t expect any surprises regarding the decision to hold the overnight rate steady.”
GDP Slipped in May—But It’s Not All Bad News
May’s GDP numbers, due Thursday, are expected to show a 0.2% decline. But that drop is more about one-off disruptions than a broader economic slump. Wildfires in Alberta sharply curtailed oil production, and retail sales took a hit as consumers pulled forward purchases in March and April to dodge incoming tariffs.
Still, Fan and Xu note signs of a bounce back. “Statistics Canada’s preliminary estimate was for a 1.6% increase in nominal retail sales in June following the 1.1% May decline,” they point out. And rebuilding activity post-wildfires likely gave other sectors a bit of a lift too.
Zooming out, Q2 GDP growth is looking flat—but not negative. That aligns with the more optimistic of the two scenarios laid out by the BoC back in April, when uncertainty around global trade made any kind of base case projection nearly impossible.
Why Isn’t the Bank Cutting Again?
With the economy sluggish, why not offer another rate cut? Fan and Xu lay out three big reasons why the BoC is likely staying on hold.
- Global trade tensions are still a risk—but Canada has a buffer.
Thanks to CUSMA, “the vast majority of Canadian goods exports [are] enter[ing] the U.S. duty-free,” Fan explains. That’s helping Canada dodge the worst of the tariff fallout.
- The job market may have found its footing.
“The Canadian labour market showed signs of bottoming out in June,” Fan writes. Job postings—measured by platforms like Indeed—have stabilized after falling earlier in the year. And sentiment, which fell off a cliff in March, is climbing back.
- The worst-case economic outcomes now look less likely.
“We continue to consider the most severe economic scenarios as less probable than earlier in spring,” Fan adds. Conditions remain soft, but the economy isn’t spiraling—and that’s giving the BoC reason to wait.
But the Big Worry? Inflation’s Not Playing Along
While growth remains underwhelming, inflation is proving to be more stubborn than expected.
“More unnerving for the BoC are recent inflation reports that have surprised broadly to the upside,” Fan warns. The main issue? Domestic services. These sticky categories are driving core inflation higher, even as consumer demand slows.
“This contradicts earlier expectations that softening in domestic demand would lead to further disinflation and easing in core inflation,” she adds.
Bottom line? The Bank’s inflation forecast just isn’t holding up—and that’s enough to keep them from reaching for another rate cut.
Which leads to the key conclusion from Fan and Xu: “Sticky inflation readings, a weakening but relatively resilient economic backdrop and prospects for larger fiscal spending are reasons why we do not expect the BoC will cut again in this cycle.”
A Look at the Week Ahead
There’s more on the radar this week than just the rate decision:
- Thursday’s SEPH data will offer clues about labour market slack. RBC notes that job postings “have stabilized in the summer after declines earlier in the year.”
- South of the border, a packed U.S. data calendar awaits. Q2 GDP (out Wednesday) is expected to show 2.5% annualized growth, thanks partly to a reversal of Q1’s distorted trade figures. On Friday, July payrolls are forecast to show steady job growth, with the unemployment rate likely holding at 4.1%.
These releases will be key for gauging not just Canada’s outlook, but how much divergence might emerge between the BoC and the Fed.
Final Word: It’s the End of the Easing Road
The message from RBC is crystal clear. The BoC may have done its part in easing rates last year, but that chapter is closing. With inflation lingering and no clear catalyst for contraction, the central bank looks ready to ride out the rest of 2025 in wait-and-watch mode.
As Fan sums up: “We do not expect the BoC will cut again in this cycle.”
In other words—no sudden moves, no new bets, just a quiet, calculated pause while the Bank navigates the hazy middle ground between too much inflation and too little growth.
Footnote:
1 RBC. RBC Economics. Claire Fan, Abbey Xu. "Bank of Canada poised to hold rates steady, unveil new projections." July 28, 2025.
