While the latest Bank of Canada survey data suggests both businesses and consumers are in need of more financial relief amid the trade war, many economists doubt the central bank will cut rates on July 30.
Most business owners are feeling less pessimistic about a potential recession than earlier this year, but still say they’re feeling “subdued,” according to the results of the latest Business Outlook Survey released by the Bank of Canada on Monday.
“Business sentiment, although still subdued, has improved from the sharp declines recorded in March and April 2025,” the Bank of Canada says in its summary of the survey findings.
“The share of firms planning for a recession in Canada has declined slightly, from 32 per cent (at the end of March) to 28 per cent (at the end of June), but remains above 2024 levels, reflecting ongoing concerns about trade tensions.”
The Bank of Canada also reports that consumers share a similar outlook, in that many are holding off on big-budget purchases or other long-term commitments because of the uncertainty surrounding the trade war and tariffs.
“A higher-than-usual share of consumers said the future is particularly hard to predict right now. Households are reacting to uncertainty by reducing spending, delaying major purchases, and increasing savings,” the Bank of Canada says in its findings.
“This, in turn, makes it more difficult for businesses to understand how demand conditions will evolve.”
The Bank of Canada last cut interest rates in March.
What have businesses been saying?
The report shows how the trade war has led many businesses to make changes in anticipation of higher costs as a result of U.S. President Donald Trump’s tariff policies.
For example, in order to avoid having to increase prices for consumers, the survey shows most businesses are “absorbing” these costs — even if it means making less profit.
“Tariff-related cost increases are also putting upward pressure on firms’ expected selling prices,” the Bank of Canada says in its survey summary.
“Because customers are sensitive to price increases, many firms are absorbing a portion of these increased costs, compressing their profit margins in an effort to preserve market share.”
This method of maintaining a customer base by not raising or minimally raising prices, while seeing less profit from higher costs, may work for the short term, but may not last long.
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“The reality is businesses can’t cut their margins for that long, and it means they’re going to have to either eventually raise prices or find efficiencies elsewhere,” says Doug Porter, chief economist at the Bank of Montreal.
“If you’re not earning a decent rate of return (profits), then you’re probably not going to invest for the future.”
Other ways businesses reported they are adapting to tariffs and uncertainty include cutting costs where possible, as well as finding new suppliers beyond the United States.
In the case of cutting jobs, most businesses reported that doing so was a “last resort.”
Although there were some job cuts in the spring, with thousands of manufacturing jobs shed in particular, the June report on the labour market showed Canada was starting to add jobs back.
Still, the uncertainty of the trade war is the biggest concern for businesses, according to the report, and given the ongoing trade talks between Prime Minister Mark Carney and Trump, many businesses are holding off on any investment in expansion plans until there is more clarity.
“Changing trade policies mean that businesses do not know if and when tariffs will be imposed and how long they will last. This particularly affects firms directly involved in international trade,” the Bank of Canada says in its report.
“Faced with high uncertainty, firms are reluctant to make costly and hard-to-reverse decisions that may not be appropriate if trade policy or economic conditions change.”
By absorbing some cost increases, holding off on investing, improving efficiencies and maintaining customer bases, the report suggests businesses may be able to tread water for now amid the uncertainty surrounding the trade war.
However, it likely isn’t sustainable for businesses in the long term.
“As long as this uncertainty or lack of clarity lingers on the trade front, you’re going to get businesses very reluctant to commit, to invest for the longer term,” Porter says.
“I think that’s really the damage that the trade war and the uncertainty does, is it just keeps businesses locked in place. And let’s face it, to expand, to improve productivity, to grow our incomes, we need business investment. We need capital spending.“
What does this mean for interest rates?
In line with its mandate to promote the economic and financial welfare of Canada, the Bank of Canada aims to keep inflation within a target zone — between one and three per cent per year — and it uses interest rates to try to achieve that goal.
To do that, the central bank adjusts interest rates to eventually hit a sweet spot, or what the Bank of Canada calls a “neutral” level, where Canadian households and businesses are able to afford current borrowing costs while still allowing the economy to grow at a sustainable pace.
But the Bank of Canada is making those decisions in an environment rife with uncertainty and where many businesses and consumers are feeling the pain of rates that are historically normal but higher than what many have been used to over recent years.
Lower interest rates would, for instance, bring down monthly costs for those with variable-rate loans like a mortgage. At the same time, lower rates also spur consumers to spend more.
If borrowing costs are too low, then the ripple effect is that prices for goods and services like food and shelter could rise out of control.
On the other hand, if rates are too high, then economic growth can slow down or even reverse into a recession, as it may be too difficult for most consumers and businesses to borrow money and lead them to tighten their belts more generally.
The most recent inflation report showed prices increased in June by 1.9 per cent — within the central bank’s target range.
One of the other factors the Bank of Canada will consider? The recent jobs report from last month, as a strong job market usually means Canadians are better able to afford monthly costs, including from loan interest.
“We saw a strong gain in employment and a decline in the jobless rates (in June),” Porter says.
“So that reduced the pressure on the Bank of Canada to cut rates.“
So the Bank of Canada may not make any changes to rates on July 30, based on what most economists are predicting.
Porter says the central bank may still cut rates later this year, but a lot will depend on “if we can reach some kind of a trade deal with the U.S., even if it’s just a framework — as long as it provides some clarity.”