The Bank of Canada (BoC) released the deliberations behind its July 15 decision to hold its policy rate at 2.25%, a move that was made as global events rapidly evolved. The BoC's Governing Council began its policy meetings on July 7 and finalized the decision on July 15, during which time hostilities in the Middle East re-escalated, pushing global crude oil prices higher. Despite this, the BoC maintained its forecast that inflation would ease to roughly 2.5% in the second half of the year, based on the assumption that crude oil prices would decline. Policymakers pledged to look through the direct effects of higher energy prices but promised to respond if those effects broadened into other goods and services, making their commitment conditional on market developments. Since then, Brent crude experienced a 16% three-session slide—the steepest since 2020—followed by a bounce of more than 4% on the day of the report [1].
The BoC identified two major risks: upside inflation from the ongoing war and downside growth from US trade policy. The latter materialized when, five days after the BoC's decision, the White House imposed 50% duties on a range of Canadian goods, including wine, dairy, cement, and furniture. In response, Ottawa intensified negotiations, with Prime Minister Mark Carney stating that nothing is being ruled out depending on the outcome of the talks. The war risk also escalated, as a four-day stand-down in the Gulf ended with US forces intercepting an Iranian missile attack and striking Iran-aligned militias in Iraq alongside Saudi forces [1].
Despite these risks, the BoC's deliberations did not provide a policy rate that could directly address either scenario. The Council described an economy with no growth projected between the first quarter of 2025 and the first quarter of 2026, unemployment steady at 6.5%—a level it has held for a year—and a labor market that remains soft. The policy rate is already at the floor of the BoC's neutral range [1].
Market reaction was muted, with USD/CAD trading in a narrow 30-pip range just below 1.4100 and slightly lower on the day. The BoC attributed the Canadian Dollar's depreciation to a widening bond-yield differential, as US yields rose on strong data while Canadian yields remained stable. This highlights the BoC's view that external factors, particularly US monetary policy, are currently the main drivers of the Canadian Dollar [1].
CONCLUSION
The Bank of Canada's decision to hold rates reflects a cautious approach amid significant external risks, including US trade policy and Middle East tensions. With the Canadian Dollar largely unmoved and the central bank acknowledging its limited influence over current market drivers, the outlook remains uncertain, hinging on developments outside Ottawa's control.