Bank of Canada and U.S. Federal Reserve continue to leave interest rates unchanged

Jenny Wng

July 30, 2025

Key takeaways

Both the Bank of Canada and the U.S. Federal Reserve held interest rates at current levels once again.
Uncertainty continues to freeze monetary policy, but both central banks are prepared to cut rates when deemed appropriate.
Both economies remain resilient, with equity markets in each country continuing to chart higher despite ongoing uncertainty.

For July, both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed), once again, decided to hold interest rates at current levels. The BoC’s policy rate is still at 2.75% and the Fed’s target rate range remains at 4.25-to-4.5%. Both central banks continue to voice concerns about uncertainty with regards to growth, inflation and more.

Trade still top of mind for BoC

Albeit to a lesser extent, U.S. trade policy remains unpredictable. Given this, the BoC prepared three scenarios in its latest Monetary Policy Report (MPR) reflecting if tariffs remain where they are (as of July 27^th), if they come down and if they escalate.

After strong growth in the first quarter as exports increased from trying to get ahead of tariffs, GDP declined in the second quarter. Exports slowed following the pre-tariff rush and American demand for Canadian goods declined. All things considered, the Canadian economy has been resilient.

Under the first scenario, Canadian GDP will pick up to around 1% in the second half of the year. Economic slack will persist through 2026 and shrinks as growth increases towards 2% in 2027. In the tariff de-scalation scenario, economic growth rebounds more quickly. In the escalation scenario, the economy will shrink through the rest of 2025.

Inflation ticked higher in June, largely reflecting higher prices for non-energy goods and still high shelter prices. Under scenario one, inflation will stay close to 2%, lower tariffs would reduce upward pressure on inflation and higher tariffs would increase it.

Taken from the BoC’s statement, “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.” At this time, we still believe the BoC will cut interest rates before the end of the year.

Dissent within the Fed

The Fed summarized, “although swings in net exports continue to affect the data, recent indicators suggest that growth of economic activity moderated in the first half of the year… Inflation remains somewhat elevated.” Much like the BoC, the Fed continues to believe that the economic outlook is uncertain, justifying its wait-and-see approach. As a reminder, the Fed’s June Summary of Economic Projections (SEP) already reduced growth expectations and dialed up inflation expectations.

The June SEP also outlined rate cuts for 2025—while President Trump expects a cut following the Fed’s September meeting, Fed Chair Powell insisted that no decision had been made. Powell remains steadfast in this view that more time is needed to understand and assess how tariffs will impact the U.S. economy and inflation. At this time, we still expect the Fed to cut interest rates before the end of the year.

It is interesting to note that for the first time in over 30 years, more than one voting member dissented on the monetary policy decision. Two Fed governors wanted to cut the federal funds rate range by 0.25% in July.

We continue to hold a net positive view on equities

Against the backdrop outlined above, global equities have continued marching up at all-time highs. While recession risks persist, leading indicators have improved, and central banks maintain room to cut rates further if needed. The overall environment remains supportive of risk-on assets like equities—inflation has peaked, fiscal policy remains stimulative and monetary policy continues to ease.

As a result, we have a modestly bullish 12-to-18-month outlook and we remain tactically overweight equities relative to fixed income and cash in our portfolios with a tactical asset allocation overlay. Our outlook for fixed income remains positive. While bond prices have recently faced some pressure as yields have risen, the higher yields present a more attractive income opportunity for investors. However, we believe equities offer greater upside potential relative to fixed income.

While much remains unknown at this time, we will continuously monitor the evolving economic and market landscape to determine the best course of action with regards to positioning your portfolio for long-term success.

The BoC’s and the Fed’s next interest rate announcements are both scheduled for September 17^th.

Jenny Wang

Jenny Wang, CFA, MA Economics, is a Portfolio Manager with the Multi-Asset Management Team. She is a member of the total portfolio management sub-team and her primary focus is on fixed income investments.

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