Bank of Canada Governor Tiff Macklem says there was a 'clear consensus' to hold the policy rate.Adrian Wyld/The Canadian Press
The Bank of Canada held its key interest rate steady for the second consecutive time, but acknowledged it may need to lower borrowing costs if U.S. tariffs and trade uncertainty continue to batter the Canadian economy.
As widely anticipated, the bank’s governing council voted to keep the policy rate at 2.75 per cent on Wednesday. This followed higher-than-expected inflation and sturdy economic growth numbers released last month, which suggest the impact of U.S. President Donald Trump’s trade war has been relatively contained so far.
“The Canadian economy is softer but not sharply weaker. And we’ve seen some firmness in recent inflation data,” Governor Tiff Macklem said in a press conference following the rate announcement, explaining the bank’s decision to remain on hold.
He said U.S. trade policy remains the “biggest headwind” facing Canada and that the trajectory of the economy, inflation and interest rates depends heavily on what happens with tariffs.
Mr. Macklem noted there have been positive developments on the tariff front since the central bank’s April decision, but trade restrictions remain and new import duties are still being threatened.
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There was consensus among the bank’s seven-member governing council in favour of holding interest rates steady, Mr. Macklem said. But there was a “diversity of views” about where interest rates should go from here, with some members apparently anticipating the need for further monetary policy easing, and others focusing more on the recent uptick in price pressures.
“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 U.S. tariffs and uncertainty, and cost pressures on inflation are contained,” Mr. Macklem said.
He added that this should not be construed as “forward guidance,” and that the bank will focus on incoming data instead of trying to forecast where the economy is headed.
Financial markets put the odds of a quarter-point rate cut at the next rate decision on July 30 at just under 50 per cent, slightly lower than before Wednesday’s announcement. Markets are pricing in between one and two more quarter-point cuts before the end of the year.
Some Bay Street analysts think the central bank will need to cut more aggressively as the trade war with the U.S. weighs on consumer spending and business investment.
“Although monetary policymakers proved reluctant to offer the economy a helping hand today, we continue to expect that the Bank of Canada will be forced to cut rates another 75 basis points this year,” Royce Mendes, head of macro strategy at Desjardins, wrote in a note to clients.
“The domestic economy continues to look very frail. Unless underlying inflationary pressures prove much stickier than expected, a return to rate cuts shouldn’t be far off.”
Mr. Trump’s erratic trade policy has made the central bank’s job particularly challenging as it tries to maintain price stability while supporting economic growth. Tariffs and countertariffs tend to hurt economic activity and increase unemployment, but they also fuel inflation, pulling monetary policy in two different directions.
On Tuesday, Mr. Trump signed an executive order to double tariffs on aluminum and steel imports to 50 per cent, which took effect Wednesday. Canada also continues to face a slew of other tariffs from the United States, although a significant portion of goods continue to cross the border duty-free because of a carveout for products that are compliant with the North American free-trade agreement.
The trade war has hammered consumer confidence and stunted business investment. But Canada has so far avoided a worst-case scenario, as Mr. Trump has backtracked on some of his most severe tariffs and given carve-outs to important industries, including auto parts manufacturing.
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“Despite a really big drop in consumer confidence, consumer spending did continue to grow in the first quarter, business investment was actually a bit stronger than we expected in the first quarter. So, you can definitely see the impact of tariffs, but there is some resilience,” Mr. Macklem said.
This was evident in first-quarter GDP, which grew at a solid annualized 2.2 per cent.
That pace, however, is unlikely to be sustained. The numbers were juiced by a spike in Canadian exports and inventory-building, as companies rushed products across the border and stockpiled ahead of tariffs. The bank expects second-quarter growth to be “much weaker” once this activity reverses, and for unemployment to rise further.
“Businesses are generally telling us that they plan to scale back hiring,” Mr. Macklem said.
When it comes to inflation – the bank’s principal concern – the picture remains murky.
The elimination of the consumer carbon price brought down Canada’s inflation rate in April to 1.7 per cent, below the bank’s 2-per-cent target. However, underlying price pressures were firmer, with the central bank’s two preferred measures of core inflation both rising above 3 per cent that month. That move caught the central bank’s attention, the Governor said.
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There are two more inflation reports before the bank’s next rate announcement on July 30.
The bank’s decision to remain on hold means there’s no immediate relief for Canada’s beleaguered housing market. Would-be home buyers have largely skipped the spring buying season as economic uncertainty makes large purchases a risky prospect and interest rates remain higher than many people have become accustomed to.
Shaun Cathcart, senior economist at the Canadian Real Estate Association, expects the housing market to heat up marginally this year. Early CREA data shows that May could be the first month where sales increase month-over-month since November.
However, Mr. Cathcart doesn’t expect any kind of major rush from buyers unless rates drop by at least a full percentage point – a level of cutting that is not currently expected in 2025.
“It’s a huge climb back to normal,” he said in an interview.
What happens next depends heavily on trade negotiations between Mr. Trump and Prime Minister Mark Carney. The two will meet face-to-face at the G7 meeting in Kananaskis, Alta., from June 15-17, although it’s far from certain that this will result in any progress.
“If Canada can get a renewed trade agreement with the United States that reduces uncertainty, the rules are clearer, and that has durability, I think that will help everybody get on with decisions,” Mr. Macklem said.
“Like everybody else, we’re watching announcements coming out of the White House very closely.”