The Bank of Canada held interest rates steady at 2.75% for a second straight meeting – matching economist and market estimates – but warned there may be a need to cut borrowing costs if the economy weakens more and inflation remains contained as US tariffs strike. The central bank provided slight forward guidance by saying it will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.
Also, the central bank said it is “proceeding carefully, with particular attention to the risks and uncertainties facing the Canadian economy. These include: the extent to which higher US tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve“.
BOC officials said they held borrowing costs steady as they gain more information on Trump’s trade conflict, which they called “the biggest headwind facing the Canadian economy” as it slams exports and adds to uncertainties for consumers and businesses. At the same time, policymakers said the economy held up stronger than expected in the first quarter, and flagged a recent surge in core inflation measures.
“With uncertainty about US tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, governing council decided to hold the policy rate as we gain more information on US trade policy and its impacts,” policymakers said in a statement.
And while they said there was “clear consensus” amofng governing council to pause and wait for more information on how the trade dispute plays out, the bank introduced some limited guidance on where borrowing costs are likely headed.
“On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued US tariffs and uncertainty, and cost pressures on inflation are contained,” Macklem said in his opening remarks, adding that policymakers had a “diversity” of views on the future rate path.
Some more highlights from today’s decision, starting with…
Tariffs:
- Recent surveys indicate that households continue to expect that tariffs will raise prices and many businesses say they intend to pass on the costs of higher tariffs. The Bank will be watching all these indicators closely to gauge how inflationary pressures are evolving.
- The outcomes of these negotiations are highly uncertain, tariff rates are well above their levels at the beginning of 2025, and new trade actions are still being threatened. Uncertainty remains high.
Economy
- The Bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up.
- The economy is expected to be considerably weaker in the second quarter, with the strength in exports and inventories reversing and final domestic demand remaining subdued.
Policy
- “We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.”
- ‘We will support economic growth while ensuring inflation remains well controlled.”
- We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”
As Bloomberg notes, the statement shows the central bank is comfortable waiting for clearer signals on how the trade dispute will evolve. At the same time, policymakers are actively discussing resuming monetary easing should the economy deteriorate and inflation remain under control. A weakening economy for the rest of the year is the base case in Bloomberg survey of economists, with gross domestic product forecast to contract in the middle two quarters of this year. Inflation is seen averaging around the bank’s 2% target throughout 2025.
When the bank paused in April for the first time this easing cycle, it abandoned point estimates for gross domestic product and inflation for the first time since the Covid-19 crisis. Instead, central bankers offered two potential scenarios for the economy. It mentioned neither of these scenarios in the communications on Wednesday.
Trump has applied tariffs on a variety of Canadian goods, including steel, aluminum, autos and products that don’t comply with the North American trade pact. Uncertainty remains elevated as the administration appeals a court ruling that overturned many of his tariffs. That ruling did not apply to his sectoral levies, and Trump signed an order Tuesday doubling the metals tariffs to 50%.
In the statement, the bank said it would continue to monitor how tariffs reduce demand for Canadian exports and how it affects business investment, employment and household spending. Officials are also watching inflation expectations and how higher tariff costs are passed through.
Macklem said it was “still too soon to see the direct effects of retaliatory tariffs in consumer price data,” referring to the levies Prime Minister Mark Carney has levied on imports of some US goods, and which are currently tallying well below the total C$20 billion the federal government is expecting.
Core inflation measures surged to 3.2% in April, the highest in more than a year. While Macklem repeated that the bank is seeing “some unusual volatility” in core gauges, he also said that the measures “suggest underlying inflation could be firmer than we thought.” Higher food prices, brought on by trade disruption, may be partially responsible, the bank said.
At 2.75%, the benchmark overnight rate is at the midpoint of officials’ estimate for the neutral range, where policymakers believe borrowing costs are neither stimulative nor restrictive.
Macklem and Senior Deputy Governor Carolyn Rogers are scheduled to speak to reporters at 10:30am Ottawa time.
In kneejerk response, there has been limited follow-through seen in CAD following the BoC’s decision despite some outside bets for the Bank to pull the trigger on another 25bps rate cut on account of soft growth metrics and ongoing uncertainty presented by the trade war. Instead, the recent uptick in inflation appears to have supported the decision to leave rates unchanged. On which, Governor Macklem says there was a “clear consensus” with the board wishing to hold policy until it gains more information. Going forward, policy decisions will likely weigh the downward pressure on inflation from a weaker economy and upward pressures on inflation from higher costs. USD/CAD was little changed with the pair pivoting around the 1.37 mark. Year-end pricing for further easing by the BoC moved from around 42bps pre-release to 37bps.
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