The Bank of Canada is seen in Ottawa, on April 16.Justin Tang/The Canadian Press
The Bank of Canada is expected to hold its key interest rate steady on Wednesday after inflation and economic growth figures were stronger than anticipated, though analysts believe rate cuts will come later this year amid trade uncertainty and the potential for a recession.
Financial market odds of a rate cut dipped slightly to 20 per cent as of Friday, according to Bloomberg data, after Statistics Canada’s gross domestic product report showed the economy grew at an annualized rate of 2.2 per cent in the first quarter.
The central bank’s decision “will still be a close call, but with economic data holding up better than feared ... a second consecutive hold on the overnight rate looks more likely than a cut at this stage,” wrote Royal Bank of Canada assistant chief economist Nathan Janzen in a client note on Friday.
The Bank of Canada held its key interest rate at 2.75 per cent in April, a decision Governor Tiff Macklem justified by pointing to the uncertainty clouding the trade outlook.
“At this meeting, we decided to hold our policy rate unchanged as we gain more information about both the path forward for U.S. tariffs and their impacts,” Mr. Macklem said on April 16.
Some forecasters were anticipating the central bank to follow up with a rate cut in June, but new economic data swayed expectations.
Canada’s inflation rate fell to 1.7 per cent in April, a decrease that was driven by the removal of the consumer carbon price. But underlying price pressures were stronger than expected, with both of the Bank of Canada’s preferred measures of core inflation accelerating from the previous month.
Economists still expect the central bank to cut interest rates at some point this year to support an economy facing U.S. tariffs and heightened uncertainty. Signs of weakness have already emerged in the labour market, with the unemployment rate rising to 6.9 per cent in April.
Stephen Brown, deputy chief North America economist at Capital Economics, noted that the first-quarter GDP report was helped by an increase in exports as U.S. companies stockpiled ahead of tariffs.
“Rather than weigh on the economy, the tariffs have had a kind of a temporary boost to GDP, but we know that that will be reversed before long,” Mr. Brown said in an interview.
The impact of U.S. tariffs on Canadian goods exports is expected to be captured in second- and third-quarter growth data. Mr. Brown said the weak economic outlook for the coming months is why he’s still expecting a rate cut this week.
“It doesn’t really matter if the [central] bank cuts in June or July, I don’t suppose. But I think when it can see a reason to cut, the bank has tended to cut rather than wait to be 100 per cent sure,” he said.
“So I’m not going to give up on the call just yet, but it’s not something I’m particularly confident in.”
Andrew Hencic, a senior economist at Toronto-Dominion Bank, said trade uncertainty makes it difficult to predict the path for interest rates.
Mr. Hencic expects the central bank to cut interest rates two more times this year, which he said “would probably provide enough support for the economy to keep chugging along.”
Last Wednesday, the U.S. Court of International Trade ruled that President Donald Trump does not have “unbound” authority to impose tariffs and ordered the administration to lift many of its duties, including the ones placed on Canada and Mexico on fentanyl-related grounds. The tariffs were then temporarily reinstated by an appellate court. Sector-specific duties – such as those pertaining to Canadian steel, aluminum and vehicles – were unaffected by the ruling and remain in place.
Mr. Hencic said those kinds of developments make it difficult for the Bank of Canada to set its policy, let alone provide any clarity on where interest rates are headed.
“From the Bank of Canada’s perspective, it’s unfortunate that they have to adjust and make decisions in a period of time where it’s highly uncertain, and there’s going to be an element of data dependency in trying to forecast forward,” he said.