With a de-escalation in US-Canada trade tensions, Prime Minister Mark Carney’s focus on stimulating the domestic economy, and sticky inflation, the Bank of Canada is seen as holding off on interest-rate cuts at its meeting on June 4, 2025.
“Barring a significant downside surprise in Friday’s GDP report, we expect the Bank of Canada will remain on hold on June 4, leaving the overnight rate at 2.75%,” says Josh Nye, senior economist at RBC Global Asset Management.
Nye and other observers find further support in the overnight index swaps market, which assigns a 70% probability to the Bank of Canada maintaining rates.
The central bank cut policy rates seven times since last summer before pausing at its April meeting, choosing to stand pat at 2.75%.
Economic Indicators to Watch
Canada’s economic outlook remains murky. While it seems clear that core inflation could remain sticky and consumption might weaken, the timing, magnitude, and sequence of these changes are still up in the air, says Jack Manley, global market strategist at J.P. Morgan Asset Management.
“Given the upside surprise in April core inflation, which is now on the high end of the bank’s target range, I can’t imagine the bank will resume cutting at this week’s meeting, especially with March retail sales showing some (likely artificially inflated) consumer momentum to close out 1Q,” he says.
David Doyle, head of economics at Macquarie Group, highlights the need to watch how much weight the BOC places on headline inflation relative to core measures. “These [two inflation measures] have diverged in recent weeks,” he says, adding that policymakers’ commentary “could provide insight into the timing of any future rate cuts.”
Beyond inflation, Canada’s labor market also holds clues to policymakers’ current stance, says Stephen Brown, deputy chief North America economist at Capital Economics.
“The key thing to watch for from the Bank of Canada next week is whether the bank is willing to support the weakening labor market despite recent above-target core inflation prints,” he says.
Investors should also watch for any shift in the central bank’s messaging regarding “trade policy uncertainty and its impact on the economy and interest-rate decision-making process,” adds Doyle.
How Will Tariff Worries Affect the BOC Rate Decision?
Since the Bank of Canada’s April meeting, US trade rhetoric has generally moved toward de-escalation. “Canada continues to be relatively less targeted by US tariffs, facing one of the lowest effective tariff rates on its exports to the US, by our estimation,” notes RBC’s Nye.
Canada, he adds, remains mostly exposed to sector-specific tariffs that may be better addressed through fiscal measures.
“On balance, we’re likely tracking closer to the Bank of Canada’s more optimistic Scenario 1 from its April MPR [Monetary Policy Report] rather than the more pessimistic Scenario 2,” Nye says, while stressing that US trade policy uncertainty, although reduced, remains elevated.
Echoing this view, Capital Economics’ Brown says that the bank now seems to consider the US-Canada trade relationship stable enough that it needn’t be overly concerned about retaliatory tariffs exacerbating inflation.
However, he cautions that “There is a risk that the bank will instead wait a little longer to see how the effects of the US tariffs and Canada’s retaliatory tariffs are playing out.”
Brown forecasts a 25-basis-point rate cut in June but acknowledges that “the bond market is saying the opposite, that the more likely option (about 70% implied chance) is a second consecutive pause.”
Nonetheless, he argues that slowing economic growth and dwindling employment numbers could force policymakers to ease more than markets currently expect. Brown projects the policy rate to fall from the current 2.75% to “2.00% by year-end, versus the 2.40% year-end rate implied by interest-rate swaps.”
RBC’s Nye adds that without a federal budget expected until the fall, the Bank of Canada lacks clarity on fiscal policy direction. However, should the Carney government make good on its promised personal income tax cut effective July 1, it “might have the same stimulative effect as a 25-basis-point rate cut,” he suggests, predicting another rate pause.
Any commentary on global fixed-income trends and the decline in the US dollar/Canadian dollar exchange rate, which are causing tighter domestic financial conditions, will also be worth watching, “particularly for any hints that the Bank of Canada might need to push back against those forces with easier monetary policy,” Nye adds.
What Are Bond Markets Signaling About Rate Cuts?
J.P. Morgan’s Manley observes that 10-year government bond yields have risen over the past month, which is “a reflection of improving sentiment around the macro backdrop.”
If the US has indeed moved past “peak tariff enthusiasm” and Bank of Canada Governor Tiff Macklem is “able to negotiate a strong position for Canada in upcoming CUSMA [Canada-United States-Mexico Agreement] talks, then recession risk is lower,” he reasons.
In the absence of a marked decline in bond yields, traders remain skeptical that a rate cut is imminent. Government bond yields, which are highly sensitive to expectations of monetary policy, are closely monitored for any clues on the central bank’s policy direction.
“The bond market is suggesting [only] about 25% of a rate cut next week, with approximately 40 basis points of cuts through year-end,” says Macquarie’s Doyle.
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