The Bank of Canada today maintained its target for the overnight rate at 2.75%, with the Bank Rate at 3% and the deposit rate at 2.70%.
“Since the April Monetary Policy Report, 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. However, 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,” said the Bank in a statement.
“While the global economy has shown resilience in recent months, this partly reflects a temporary surge in activity to get ahead of tariffs. In the United States, domestic demand remained relatively strong but higher imports pulled down first-quarter GDP. US inflation has ticked down but remains above 2%, with the price effects of tariffs still to come. In Europe, economic growth has been supported by exports, while defence spending is set to increase. China’s economy has slowed as the effects of past fiscal support fade. More recently, high tariffs have begun to curtail Chinese exports to the US. Since the financial market turmoil in April, risk assets have largely recovered and volatility has diminished, although markets remain sensitive to US policy announcements. Oil prices have fluctuated but remain close to their levels at the time of the April MPR.”
In Canada, economic growth in the first quarter came in at 2.2%, slightly stronger than the Bank had forecast, while the composition of GDP growth was largely as expected, it said.
“The pull-forward of exports to the United States and inventory accumulation boosted activity, with final domestic demand roughly flat. Strong spending on machinery and equipment held up growth in business investment by more than expected. Consumption slowed from its very strong fourth-quarter pace, but continued to grow despite a large drop in consumer confidence. Housing activity was down, driven by a sharp contraction in resales. Government spending also declined. The labour market has weakened, particularly in trade-intensive sectors, and unemployment has risen to 6.9%. 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,” explained the Bank.
“CPI inflation eased to 1.7% in April, as the elimination of the federal consumer carbon tax reduced inflation by 0.6 percentage points. Excluding taxes, inflation rose 2.3% in April, slightly stronger than the Bank had expected. The Bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up. 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.
“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. 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.”
A widely expected stand-pat decision on rates didn’t put a nail in the coffin for a further easing by the Bank of Canada, with its announcement still noting risks to growth ahead,” said Avery Shenfeld, Chief Economist and Managing Director, CIBC Capital Markets.
“In line with its recent messaging, the Bank continues to await greater clarity on various policy fronts, and weigh risks of tariff-driven inflation against the downward inflation pressure of economic slack. The statement noted the mixed picture for growth in Q1 and its expectation that Q2 will be considerably weaker, but also the upward move in some core inflation measures, and its press statement said that they judged that underlying inflation might be firmer than they thought,” he said.Â
“July looks more promising for a quarter point ease if, as we expect, the jobless rate continues to move higher, and inflation in items not subject to tariff pressures eases off a bit. The BoC will publish a detailed economic forecast to accompany that decision, and we look for final quarter point reduction, to 2.25% in September. Today’s non-move was well anticipated by markets, and most investors will want to see Friday’s jobs data before changing their views on the direction of the policy rate.”
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