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As widely anticipated, the Bank of Canada held its overnight interest rate at 2.75% for a second consecutive meeting, but acknowledged a cut could be necessary if US tariffs cause the Canadian economy to deteriorate.
The central bank said its decision was underpinned by uncertainty surrounding unresolved trade deals between the United States and its trading partners, particularly China. Additionally, concerns over economic weakness and the recent uptick in inflation prompted the Governing Council to leave the policy rate unchanged. Instead, policymakers are opting to wait and observe the impact of US tariffs, which they describe as the biggest headwind facing the Canadian economy.
“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,” said the bank’s press release.
Since it started its easing cycle last summer, the bank has delivered seven cuts, bringing the interest rate from its peak of 5.00% to its current 2.75%. It’s stood pat for its last two meetings.
The Canadian dollar rose slightly following the rate announcement, trading at C$1.3698 against the US dollar. The 10-year Government of Canada bond yield dipped briefly from 3.26% to 3.23% in the immediate aftermath before recovering.
Below are highlights from commentary on the Bank of Canada rate announcement, based on responses to Morningstar’s requests for comments and analyst notes to clients.
Bank of Canada Putting More Weight on Current Inflation Than Future Inflation
Charles St-Arnaud, chief economist at Alberta Central
“The overall message from today’s decision is that the economy is ‘softer but not sharply weaker’ while there is ‘some firmness in recent inflation data.’ When balancing the two conflicting developments since the April meeting, the Bank chose to prioritize the latter.
“This clearly means that the Bank of Canada will put more weight on current inflation than on future inflation, and that it would be a mistake to think the Bank of Canada will lean toward supporting the economy and allow inflation to move above the target. The recent inflationary episode has demonstrated the disruptive impact of high inflation on the Canadian economy, and the Bank of Canada is likely to avoid a similar situation.
“Overall, we continue to believe that the general direction for interest rates is lower. However, the pace of easing is highly uncertain and will depend on US trade policies, the magnitude of the slowdown in the Canadian economy, especially whether we see further job losses, and the evolution of inflation, especially upside pressures. Nevertheless, population growth in 2025 and 2026 will be an important drag on the economy, pushing potential growth and the neutral rate lower. This means that at 2.75%, the current policy rate level will likely become restrictive later this year.”
Bank Driven by Data, Not Forecasts
Douglas Porter, chief economist at BMO Economics
“The Bank’s rate decision and commentary were right down the middle of the plate, delivering few surprises. While the forward-looking statement suggests that the Governing Council is not eager to cut much further, we suspect that a combination of softer activity and milder core inflation trends will prompt additional action. If inflation slows over the next couple of prints (we get two CPI releases and two jobs reports before the late-July meeting) and the economy slows as widely expected (we have much higher conviction on the latter than the former), the door is still wide open for the Bank of Canada to cut rates in July.
“Two key takeaways [from Bank of Canada Governor Tiff Macklem’s opening statement]: 1) Governing Council was in less doubt than the market about holding rates steady this time, and not all members are on board with the need for future cuts. 2) The Bank will be driven by the data on hand (on growth and inflation), and not by forecasts, before they cut again.”
From an Investment Viewpoint, Stay Nimble
Rachel Siu, managing director, head of Canadian fixed income strategy at BlackRock
“We believe the Bank’s rate pause reflects their data-dependent stance given the wide range of potential outcomes as uncertainty remains elevated. From an investment standpoint, with continued uncertainty and market volatility, we believe it’s important to stay nimble as the environment evolves.
“Global diversified income solutions can also offer potential cushion in today’s regime. We believe there is an attractive opportunity to construct a portfolio that maintains a strong focus on generating a high level of diversified carry and income as a way to build resilience, while favoring duration in the front and belly of the curve as we think term premium may be in a structural adjustment towards higher levels.
“Duration diversification outside of the US to regions like Europe can also be attractive with diverging fundamentals across inflation, growth and deficits potentially driving divergence across central banks.”
Three More Rate Cuts This Year
Stephen Brown, deputy chief North America economist at Capital Economics
“The Bank of Canada avoided surprising markets by keeping interest rates unchanged at 2.75% today, as it continues to wait to see what the full impact of uncertain US trade policy on the economy will be. The accompanying statement did express some concern about the economic outlook, but on the whole the commentary was not as gloomy as it was in April.
“This poses a risk to our view that the Bank will cut rates three more times this year but, with the economy rapidly losing momentum and upside risks to inflation fading, we are sticking to that view. That would take the policy rate to 2%.
“Given recent signs of weakness in the economy—particularly in the labor market and areas like housing and manufacturing—it was perhaps surprising to see that the accompanying statement was not more downbeat on the growth outlook.”
July Looks More Promising for a Quarter-Point Ease
Avery Shenfeld, senior economist at CIBC Economics
“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. The opening statement to the press conference noted that members of its Governing Council were aligned on a decision to pause today, but while divided, “on balance” they seemed to expect that a further easing could prove necessary. 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.
“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 Bank of Canada 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.”
Canada’s Central Bankers Chose to Kick the Can Down the Road
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“Canadian central bankers chose to kick the can down the road by holding rates steady in the face of still-elevated uncertainty. While officials expect the economy to be ‘considerably weaker’ in the second quarter, they weren’t ready to deliver any relief to Canadians today. Macklem spent a lot of time in the opening statement of his press conference discussing the resilience in Q1 exports instead of commenting on recent indicators that have shown a sharp reversal in US trade activity. The communiqué also spilled more ink on measures of inflation that had heated up instead of total price growth which was subdued as a result of the elimination of the federal consumer carbon tax.
“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. The rationale for holding rates steady today is already on shaky ground. Macklem cited the resilience in exports as a reason not to cut, but the latest US trade data show a sharp reversal in imports. Moreover, Statistics Canada noted that the machinery and equipment spending that showed up in Q1, which Macklem pointed to as a positive surprise, looked like it was tied to buyers front-running Canada’s retaliatory tariffs.
“As a result, early indications point to a sharp reversal in exports and business investment in the second quarter, which will compound the ongoing weakness in Canada’s housing market. Overall, 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.”
Bank of Canada Has the Luxury of Time, for Now
Philip Petursson, chief investment strategist, IG Wealth Management
“It was largely expected that the Bank of Canada would hold its overnight rate firm at 2.75%. Governor Macklem didn’t disappoint. The first quarter GDP print that came in slightly better than expected along with the current inflation and unemployment data gave the Bank a reprieve from having to cut rates again. For now, the Bank has the luxury of time to wait and see what transpires south of the border with respect to the current tariff situation.
“Sitting at 2.75%, the Bank of Canada doesn’t have much further to cut to get to 2.25%-2.50%, where we believe will be the terminal rate for this easing cycle. Holding off for now is the prudent approach. There is no immediate economic justification to rush to cut by an additional 25 basis points nor would an additional 25-basis-point cut make a meaningful difference to the Canadian economy. Rather, waiting to see what President Trump and in turn, Prime Minister Carney do with respect to tariff negotiations allows the Bank to act further if necessary, or hold firm in what might be a stabilizing economy.”
The Bank of Canada’s July Meeting Is Very Much in Play for a Rate Cut
Dustin Reid, chief strategist, fixed income at Mackenzie Investments
“The Bank of Canada held its policy rate at 2.75% today, in line with both market pricing and consensus expectations. While inflation remains elevated, particularly core measures, the Bank signaled that trade uncertainty and tariff-driven distortions continue to complicate the policy outlook. Notably, the Bank of Canada flagged that recent strength in Q1 was likely front-loaded due to net export activity and an inventory build tied to those same tariff concerns, with Q2 growth expected to be ‘considerably weaker.’
“The commitment to ‘support economic growth while ensuring inflation remains well-controlled’ suggests a growing willingness to cut rates towards the bottom-end of its neutral range if the data justifies it. The Bank of Canada’s July meeting is very much in play for a rate cut, if the growth backdrop softens further and medium-term inflation expectations remain well anchored.”
This Two-Meeting Pause Need Not Extend to Three
Taylor Schleich, director, economics and strategy at National Bank of Canada
“While Macklem noted there was a ‘clear consensus’ to hold, we didn’t see the decision as a glaringly obvious one. In more normal times, a flagging labor market and housing market paralysis would lead to policy relief but >3% core price pressures, tariff-related inflation risks and generalized uncertainty has the Bank preferring to wait it out for greater clarity.
“This now two-meeting pause need not extend to three however, as we’d characterize today’s decision as a ‘dovish hold’, setting up a potential rate cut in eight weeks’ time. Indeed, an acknowledgement that there ‘could be a need for a reduction in the policy rate if the economy weakens […] and cost pressures on inflation are contained’ leaves the door open to a cut in July. Given our expectation for more acute economic weakness and well-contained inflation pressures, a July cut is more likely than not in our estimation. Nonetheless, a commitment to data dependence and a self-imposed inability to be forward-looking means the inter-meeting period could be volatile again. Our July cut call will be first put to the test on Friday, when the May Labor Force Survey will be released. We expect net job losses and a higher unemployment rate to push markets toward pricing a July cut, after which the May CPI report will come into focus.”
Pervasive Uncertainty Around US Trade Policy and Tariffs Affecting the Economy and Inflation
Michael Davenport, senior Canada economist at Oxford Economics
“As was the case in April, pervasive uncertainty about US trade policy and how tariffs are impacting the economy and inflation was the key reason why the Bank of Canada opted to stay on the sidelines. The Bank expressed concern with the rise in core inflation in April, along with recent survey data that suggests both households and firms expect prices to rise because of tariffs. Importantly, while there was a consensus to hold rates today, on balance, members of the Governing Council believe rate cuts may be needed if inflation remains contained and the economy weakens.
“We think the Bank of Canada is in a bind as it weighs the downside risks to growth from the trade war against the upside risks to inflation … We expect the Bank will continue to hold rates steady in July as pervasive uncertainty persists and core inflation edges higher. We can’t rule out a couple more 25-basis-point cuts this year, but we don’t think the policy rate will fall below 2.25%—the low end of the Bank of Canada’s neutral range—unless it’s convinced that inflation is under control and the economy needs more monetary stimulus.”
Tariff Impact Reliant on Soft Data and Intel From Businesses
Claire Fan, senior economist at Royal Bank of Canada
“Going forward, we think the path of the Bank of Canada will be largely determined by the extent of further softening in the economy. Both we and the central bank are expecting GDP growth will slow sharply in Q2 while the unemployment rate continues to edge higher.
“In the press conference, Governor Macklem also noted difficulties in deciphering the tariff impact in the official CPI data, and highlighted reliance on soft data and intel from businesses that already suggested cost increases. Overall, generally targeted counter-tariff measures and other reasons underpin our expectation of noticeable but moderate impact to Canadian inflation from tariffs this year. We think it’ll roughly offset the impact of the end of consumer carbon tax to leave headline CPI tracking just above the target 2% rate over the second half of 2025.
“So far, longer-term inflation expectations—a key element that could determine if inflation persists beyond what’s justified by tariffs—also appear well anchored. Later this year, faster rising/more heightened than expected price pressures could also raise odds of fewer rate cuts from the Bank of Canada.”
Bank of Canada Decidedly Dovish
Tu Nguyen, economist at RSM Canada
“While the policy rate remains steady, the statement was decidedly dovish. Therefore, we expect two more rate cuts this year to bring the policy rate to terminal at 2.25% is still the base case.
“The July rate cut is certainly possible, especially with souring job numbers and rising core inflations. The likelihood of a cut will also depend on developments related to tariffs from the US, especially in trade negotiations with Canada. While inflation expectations remain near the 2% target, should economic conditions deteriorate, the Bank would cut rates further.
“The Bank’s primary goal is to maintain price stability as a source of confidence and stability to guide the economy through this period of global upheaval. To this end, the Bank will need to balance the upward pressures from tariffs and subsequent trade disruptions and the downward pressures from a weaker economy.”
Core Inflation Puts Bank of Canada in a Bind
Leslie Preston, managing director and senior economist at TD Bank
“At its April decision the Bank of Canada said that they would proceed carefully with attention to the risks and uncertainties. Since then, the private sector shed jobs in back-to-back months, demand in the domestic economy came to a halt in the first quarter, and the housing market remains soft. However, core inflation pressures also picked up above 3%, putting the Bank of Canada in a bind. Given there isn’t any more certainty on tariffs than there was in April, there was a clear consensus among Governing Council to hold policy unchanged as they gained more information.
“Looking ahead though, members of Governing Council thought there could be a need for a reduction in the policy rate if the economy weakens and inflation is contained. But, that the Bank is being less forward looking than usual given the high degree of uncertainty on what the tariff picture looks like. We expect that barring a trade negotiation miracle with the Trump administration, Canada’s economy is likely to tip into recession this year, and more interest rate cuts will be required.”
Economic Impacts From Tariffs and Trade Uncertainty Outweigh Inflationary Risks
Ashish Dewan, investment strategist at Vanguard Canada
“We expect the Bank of Canada to cut rates to 2.25% by year-end 2025 amid substantial US-Canada trade uncertainty and concerns about the inflationary implications of retaliatory tariffs on US imports. We expect the economic impacts from tariffs and trade uncertainty to outweigh any inflationary risks.
“With core inflation measures above 3% and almost 50% of the CPI basket with an inflation rate of over 3% coupled with strong Q1 GDP numbers, albeit largely due to businesses and consumers front-running tariffs, the Bank of Canada decided to take a cautious approach. Canada’s outlook is increasingly uncertain following the US administration’s potential decision to double tariffs on steel and aluminum imports and expand measures targeting the auto sector. These developments are expected to weigh heavily on business investment, consumer spending, and employment.”
Sooner Policy Cuts May Help Prevent Recession
Jim Whitestone, environmental and financial economist at Woodridge Solutions
“This flagging on the demand side will outweigh potential inflationary pressure from the impact of tariffs and trade wars on the economy’s supply side. This weakness means the Bank of Canada will have to cut its policy rate sooner or later. Doing it sooner may help prevent the economy from sliding into recession, something which is looking increasingly likely. The Bank of Canada should eventually be resuming rate cuts to get their interest rates lower to somewhere around 2%, again, to cushion the Canadian economy for what’s to come. Obviously, cutting interest rates can encourage businesses and consumers to spend—mitigating an economic hit.
“My work is focused on energy and the environment so lower interest rates will reduce the cost of capital for large energy infrastructure projects discussed between Premiers and Mark Carney this week including CO2 and other pipelines, grid interconnections and modernization as well as renewable energy projects. This could stimulate private investment in clean energy technologies, especially in areas where financing costs have been a barrier (e.g., pipelines, grid interconnections, battery storage, etc.).”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
