On Wednesday morning, the Bank of Canada (BoC) announced they would be keeping the policy rate steady at 2.75%. This follows on the heels of the Bank's last announcement in April, in which it announced the first hold in a year. However, the BoC has delivered a total of 225 basis points (bps) worth of cuts since June 2024 — more than any other global central bank — including half-point cuts in both October and December.
In a statement, BoC Governor Tiff Macklem said there was a “clear consensus to hold policy unchanged” as they gain more information.
“Since our April decision, the US administration has continued to increase and decrease various tariffs. China and the United States have stepped back from extremely high tariffs, and bilateral trade negotiations have begun with a number of countries. The extreme financial turmoil we saw in April has moderated and stock markets have recovered their losses. However, the outcomes of the trade negotiations are highly uncertain, tariffs are well above their levels at the beginning of 2025, and new trade actions are still being threatened. The recent further increases in US tariffs on steel and aluminum underline the unpredictability of US trade policy.”
He also underscored that though 0.6 percentage points were knocked off inflation in April due to the elimination of the consumer carbon tax, putting it at 1.7%, inflation excluding the tax effect was stronger than expected at 2.3%.
“The Bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up in April. There is some unusual volatility in inflation, but these measures suggest underlying inflation could be firmer than we thought. Higher core inflation can be partly attributed to higher goods prices, including food, and may reflect the effects of trade disruption. Many businesses report they are already facing higher costs related to finding alternative suppliers and developing new markets. The Bank will be watching measures of underlying inflation closely to gauge how inflationary pressures are evolving.”
Leading up to today’s announcement, economists with Canada’s ‘Big Five’ banks said that there was ample reason for the central bank to cut this week amid trade tension that has, to varying degrees, begun to show up in economic data. Even so, all were leaning towards a hold. CIBC Economist Avery Shenfeld said in a report from Friday that a cut this month is “readily” justified, given that GDP only saw a slight uptick (0.1%) in April, while weakness in the Labour Force Survey and Survey of Employment, Payrolls and Hours pointed to “a widening output gap.”
“But while we would argue that a cut would be the right step, odds are that the BoC won’t deliver one just yet, having signalled that it’s less willing to be forward looking amidst considerable uncertainty over the outlook,” Shenfeld said. “So we look for a pause next week, but one accompanied by a message that leaves the door open for rate relief ahead. Unless a sudden peace breaks out in the trade war, by the July meeting, the Bank should have sufficient clarity to actually publish an economic forecast, having not done so in April, and a wider output gap should green light a quarter-point cut then and in September.”
In addition, markets were strongly pricing a June pause, and Scotiabank Economist Derek Holt said that the BoC may be coaxed to go with that expectation. “But cutting now when it’s nowhere close to being priced and after holding since March could motivate markets to think that the BoC is priming for another round of easing. You can’t just take one chip out of the bag,” Holt said. “Markets would probably price another cut for the July meeting and maybe add more later. You’d better have a lot of confidence that a cut now is the right thing to do given the risk that it could spark outsized easing of financial conditions compared to the policy rate adjustment itself.”
For their part, economists with Scotiabank are anticipating a series of rate holds through 2.75%. But they’re the most hawkish of the bunch. Economists with TD and RBC are calling for the benchmark rate to come down to 2.25% this year, while BMO is anticipating 2.0% by year-end or early 2026.
In his Wednesday statement, Macklem cited a “diversity of views” amongst Governing Council with respect to future interest rate decisions. “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. Faced with unusual uncertainty, Governing Council is proceeding carefully, with particular attention to the risks. This means we are being less forward-looking than usual.”
The next interest rate decision is scheduled for Wednesday, July 30. A full 2025 schedule can be found here.
