Hello, I'm Rebecca Spence with the press office at the Bank of Canada. I will be moderating today's press conference on the interest rate announcement opening remarks. He and Senior Deputy Governor Carolyn Rogers will be pleased to take questions until about 11:15. So over to you, Governor.
Well, good morning and thank you. I'm very pleased to be here with Senior Deputy Governor Carolyn Rogers to discuss today's monetary policy decision. Since our last decision in July, the conflict in the Middle East has persisted without a clear path to resolution. Closer to home, the United States has imposed new tariffs on Canadian exports, and the Canadian government has responded with proportionate counter-tariffs and new supports for hard-hit businesses and workers.
Against this background, the Governing Council assessed the economic data since our last decision, the evolving risks of the outlook, and the implications for monetary policy. With recent data coming out largely in line with our July forecast, we decided to maintain the policy interest rate at 2.25%.
We have three main messages today. First, economic growth in Canada has picked up after stalling over the past year. That puts us on a stronger footing as the Canadian economy faces new challenges. But uncertainty about the sustainability of the rebound has increased with new US trade actions. Second, the ongoing conflict in the Middle East is keeping energy prices higher for longer, and this has increased the upside risks to our inflation outlook. And third, the Bank of Canada is committed to keeping inflation close to 2% over time. We will be a source of stability as Canadians navigate shifting global developments.
So let me expand on these three points. As expected, the economy strengthened in the second quarter with GDP growth up 3.3% following very weak growth in the first quarter. Some of the strength was due to temporary factors, but the pickup in activity was broad-based. Consumer spending remained resilient and, following several weak quarters, there was some rebound in housing activity. Exports and business investment were up sharply. And the labor market has also improved in recent months with increased hiring by the private sector and the unemployment rate edging down to 6.4% in July.
Still, recent indicators point to continued excess supply in the economy. The increases in exports, investment, and hiring are broadly consistent with what businesses have been telling us. They are adapting to tariffs, to uncertainty, and to new technology. Overall, the data reaffirm our view of a broadening recovery. However, new US tariffs and increased trade uncertainty pose risks to the sustainability of the rebound in economic activity. If tariffs remain in place, they will hit targeted sectors hard, but we don't expect them to have a large direct impact on the overall level of economic activity in Canada. Affected products represent about 5% of exports to the United States, and the federal government's support programs will likely mitigate some of the harm. However, the situation does remain fluid. The added uncertainty about the future of Canada-US trade relations may lead businesses more broadly to delay investment and hiring decisions.
CPI inflation has remained around 3% in recent months, mainly because of persistently high gasoline prices. This is a direct result of the conflict in Iran, which has kept global oil prices high and has led to elevated margins for refined products like gasoline and diesel. Excluding gasoline, inflation in Canada was 2.2% in July, and measures of core inflation have remained close to 2%. Market expectations for oil prices have shifted up since July. The Bank has been looking through the direct impact of higher oil prices on inflation, but we're monitoring closely for any signs that they are spreading to the prices of other goods and services. We haven't seen much evidence of that yet. But with the conflict ongoing and shipments through the Strait of Hormuz still curtailed, upside risks to our inflation forecast have increased. The longer oil prices and refinery margins stay high, the greater the risk that higher energy prices spill over and turn into persistent inflation. In addition, the new US and Canadian counter-tariffs could add costs to some businesses and feed through to consumer prices over time.
Monetary policy cannot offset the effects of tariffs or influence global energy prices. What we can do is ensure global developments don't jeopardize price stability in Canada. Since our last decision, inflation and growth in Canada have evolved broadly as forecast. Against that background, we decided to leave the policy rate unchanged. However, the upside risks to inflation have increased while new tariffs make growth prospects more uncertain. Governing Council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed. The Bank remains committed to maintaining Canadians' confidence in price stability through this period of global upheaval. And with that, the two of us would be pleased to take your questions.
Thank you, Governor. We will go to questions now. We have a large number of reporters joining us today on the call, so we kindly ask that you limit yourself to one question so that we can get to every media outlet. Before asking your question, kindly state your name and affiliation, and please mute your line if you're not asking a question. So in the first group, we'll start with Paul Vieira of The Wall Street Journal, followed by Craig Lord of Canadian Press, and then Paula of the Financial Post. So go ahead, Paul.
Can you hear me, Governor? Does your opening statement reflect the fact that you're now more concerned with inflation than any drag on growth that the trade conflict presents?
Well, Paul, we highlighted both risks. We're concerned about both risks. We saw a pretty strong rebound in the Canadian economy in the spring. It's come into the summer with more momentum. That's certainly encouraging, but there is still slack in the economy, and new American trade actions have increased uncertainty about how sustainable that rebound is. On the inflation side, look, inflation's running 3%. That's too high. Our commitment over time is to deliver 2% inflation. When you look at that inflation, it is very concentrated in gasoline, in oil prices, which are a direct effect of the conflict. CPI excluding gasoline is 2.2%.
But the conflict in the Middle East is ongoing; it's dragging on. There's no clear resolution in sight. And the longer it goes on, the longer oil prices remain high, the longer refinery capacity is taken offline and margins are high, the greater is the risk that higher energy prices start to spill into the prices of other goods and services. And then you get more generalized inflation, which could become more persistent. So look, today we held our policy rate at 2.25%. The data we've received since our last decision was broadly in line with our forecasts. But as I've just outlined, the risks are shifting, and we are prepared to adjust monetary policy as needed. We are worried about both risks. The most important thing that is going to guide our decisions going forward is going to be our inflation forecast and our assessment of the risks around that. Our inflation forecast includes the effects of slack in the economy, the downward pressure that puts on inflation; it also includes the effects of higher oil prices on the trajectory for inflation and the potential for that to spill over. So we're going to be updating that forecast. We'll have a new forecast at our next meeting, and that will really guide our decisions. Our beacon, as I said, is our 2% inflation target. We are committed to getting inflation back to 2% over time.
Good morning, Governors. Thank you for taking our questions. Craig Lord with The Canadian Press. Counter-tariffs from Canada against the United States will go into effect on September 8th. How do you judge the inflationary risks tied to those right now given that the economy is also expected to struggle to grow under the weight of a re-escalating trade war?
Yes, the counter-tariffs and indeed the US tariffs also will add costs for some businesses. There's no question about that. And those costs have to go somewhere, so over time they could feed through to consumer prices. With respect to the counter-tariffs themselves, they're mostly on intermediate inputs. Not much of them is going to directly impact things that are in the CPI. So what that means is the effect is less direct; it's going to take more time to pass through. So we will be refining our estimates. When we update our forecasts, we'll have to put a number on it. But our assessment at this point is that the inflationary impact of those counter-tariffs is fairly modest. The bigger issue for inflation is really what's going on in the Middle East. Oil prices—we saw while there was that ceasefire, oil prices come down. Obviously, the ceasefire is over. The conflict has re-escalated. Oil prices are back up. In our July forecast, we had oil prices in Q3 at $75. They're sitting at about $90 today. The real issue is how long do those oil prices stay high? How high do they go? And as I said, the longer that drags on, the bigger the risk that it starts to spill over to the prices of other goods and services. So yes, we are going to be tracking the effects of the counter-tariffs, but the much bigger impact is really what's going on in energy markets.
Hi there. Thank you for taking my question. Governor, you previously said further rate cuts may be needed to support economic growth if the US imposes significant new trade restrictions. Given what has happened recently, do you see that happening in the near future if trade tensions drag on or intensify?
When this trade conflict started with the United States—we were not looking for a trade conflict, just to be clear—but when the US first imposed new tariffs on Canada, we did lower our policy rate and we have held it low. We have held it at that lower level to try to support the economy. Look, there are two things going on. Yes, the tariffs have weighed on growth. What we saw in the second quarter is we saw the economy rebound. And what businesses are telling us, more than a year into these tariffs, is they are adapting to higher tariffs. They're finding ways to work and manage uncertainty with their US clients. They're diversifying their exports, they're shifting their supply chains, and you can see that in the data. The economy is on a lower track, but exports have rebounded, investment has come up, and hiring has been stronger in recent months. So the economy has been working through this. Yes, there is a new challenge. There's been a breakdown in trade discussions with the United States, and that certainly makes that rebound more uncertain. But as I stressed, we have to keep our eye on inflation. Inflation is running too high. The situation in the Middle East is no closer to resolution, and the longer it goes, the bigger is the chance that feeds through. As I said, where we go on interest rates is really going to be guided by our inflation forecasts and our risks around that. So yes, the risks posed by new trade actions endanger the durability of this rebound. There's already slack in the economy. If slack remains, if there's more slack, that'll put more downward pressure on inflation. But there are also important upward pressures on inflation, and we've got to look at all that together.
Next on my list, I have Mark Rendell from The Globe and Mail, followed by Promit Mukherjee from Reuters, and then Njeud Almiz from Bloomberg. So go ahead, Mark.
Hi, Governor. Mark Rendell with The Globe and Mail. I'm wondering if you can kind of talk us through how you're thinking about the downside economic shock of this breakdown in trade negotiations. As you say, the new US tariffs only hit about 5% of Canadian exports, but obviously there's going to be business confidence knock-on effects, other things like that, and the threats of significant retaliation from the US as well. So how are you thinking about how this plays out for the Canadian economy? And are we talking about heading back to some of the downside scenarios for the trade war that you had outlined last year?
Well, I think you partly answered your own question, but let me highlight a few things. First of all, we're coming into this with the Canadian economy on a better footing. As I just went through, businesses have been adapting to an environment with more uncertainty and higher tariffs. It's not easy; it's difficult, but they've got businesses to run. They're finding ways to do business. That has put the Canadian economy on a better footing going into this latest new wave of US tariffs. The second thing I would highlight is, as you mentioned, these tariffs are very steep, but they are applied to a relatively narrow base. So the businesses that get hit by these are going to be hit hard. There's no question about that. And certainly we expect to see some impact if those tariffs remain in place. You will see some impact on growth, particularly in the fourth quarter. But when you look at their impact on the economy overall, they're hitting about 5% of our exports to the United States, so we don't expect a big ongoing impact on overall economic activity. I would highlight direct impact, as you mentioned. Uncertainty has gone up. This environment could cause other businesses to hold back on business and investment decisions. And then there are threats of further actions; there could be further escalation. There are also other outcomes. Canada and the US were close to a deal. Canada's not applying counter-tariffs because they want counter-tariffs; Canada's applying counter-tariffs so we can get back to lower tariffs and those can get rolled back. So there is a range of outcomes. We're going to have to assess their impact on the sustainability of this recovery.
Hi, Governor. This is Promit Mukherjee from Reuters. Since July, the risks have clearly changed. Tariffs have escalated, Canada has announced retaliation, and energy prices have remained high. Yet the appropriate policy rate appears unchanged. Has the balance of risk generally remained the same, or do you think that inflation concerns are becoming more pronounced?
I think I've answered that question, Promit, so I'm going to ask the Senior Deputy Governor to get her perspective.
Okay. So I'm going to try and come up with something new. Monetary policy is never about one risk or one piece of data. We're always weighing multiple pieces of data, always weighing the balance of risks, and that's definitely the case right now. As you said, Promit, things have changed since July. We're looking at risks to growth that come out of the trade conflict we have right now, and then we're looking at risks to inflation that come primarily out of the situation in the Middle East. Both of those things have escalated in recent weeks coming into this decision. We've talked in the past about two layers of uncertainty. There's the uncertainty about the situations themselves, how they evolve—they're both pretty dynamic right now—and then there is the uncertainty about how they're going to transmit through the economy and their effects on growth and inflation. So we're watching the data. Yes, both have changed. As the Governor said, ultimately our mandate is to preserve price stability for Canadians, and that's what we're going to be focused on.
Hi, Governor. You've warned about the risks from a rapid unwinding of overinvestment in the US. So I'm going to double-barrel a question here. Does the recent global bond rout look like a healthy repricing of risk, or are you seeing signs of market dysfunction that could become a systemic problem? And to add on to that, do you think the US Treasury's interventions in the bond market have been appropriate?
Okay, you have packed a lot into that question. Maybe we will share the response. I'll maybe say a few words more from a monetary policy perspective, and I'll ask Carolyn to say a few words more from a financial stability perspective. In recent weeks, we have seen global, particularly US, bond rates move higher. What's going on there? When you see a substantial movement, usually it's because there's more than one thing happening at once and they're reinforcing. Underneath it all, we've got high levels of sovereign debt globally among some of the biggest countries with continued strong issuance. That debt needs to be absorbed. That's underpinning this rise in global yields. But it's not the only factor. You've got a big buildout of AI infrastructure that is putting a lot of corporate demand for issuing more bonds that has to be absorbed; that will tend to affect bond prices. And as we've discussed, the situation in the Middle East hasn't got any better, oil prices remain high, and there's no resolution in sight. Central banks' tolerance for higher inflation is limited, and that is causing the market to build in the possibility of future interest rate hikes. So all those things are tending to work in the same direction to boost global bond yields. In Canada, our yield curve is actually well below the US yield curve—depending where you are, it's a percentage point or more below—and that reflects a few things: our fiscal situation is better, inflation is lower, and the economy is weaker. The flexible exchange rate combined with our inflation-targeting framework gives monetary policy the ability to adjust monetary policy for the needs of the Canadian economy.
So our yield curve is well below. We are seeing some spillover of global bond yields into Canada, and that is something we will take into account in our monetary policy setting. We always look at financial conditions; there's almost always a few sentences in the press release assessing how we think they've changed. We noted that with the rise in global bond yields, financial conditions have tightened. You have to look at more than bond yields: you got to look at equity markets, you got to look at the exchange rate, you got to look at corporate spreads. So going forward, that is something we will take into account; that'll be built into our forecast. Perhaps the more serious issues are around financial stability, and I'll ask the Senior Deputy Governor to say something there.
Yeah, I think it's important to distinguish between volatility and dysfunction or instability. When prices and yields are moving because investors are repricing risk, that's a functioning market. The vulnerability that we have talked about in our previous financial stability reports really comes when you get leveraged investors unwinding their position quickly and liquidity starts to dry up, and in particular when those markets are intertwined with the repo markets and they start to spill over into core funding markets. That's the risk we worry about. We don't see that happening right now. What we see happening right now is a repricing of risk. Of course, we'll keep an eye on it.
All right. Next on my list, I have Mackenzie Gray from Global News, followed by Anna Pereira of the Toronto Star and Jeff Lagerquist from CBC News. So go ahead, Mackenzie.
