Bank of Canada again holds key interest rate at 2.75%, as tariff negotiations ‘are highly uncertain’

ATB Economics says “sticky” inflation kept the BoC on the sidelines on Wednesday, as the central bank held its policy rate at 2.75 per cent for the second-straight meeting.

Chief economist Mark Parsons says the Bank’s concerns about rising prices “spoils the rate cut party,” as its preferred core measures of inflation rose in the April data.

“The deal breaker appears to be inflation, which is still running too hot for comfort,” he stated on Wednesday. “True, headline inflation is now below two per cent, but that’s because of the carbon tax removal. The Bank sees through that, just like they did with the GST/HST holiday.”

Capital Group Canada is questioning the BoC’s decision on Wednesday to leave its policy rate in place. The firm’s fixed income investment director is calling for the central bank to strike an increasingly dovish tone as the economy buckles.

“With today’s announcement to keep rates steady, I believe, we are faced with an increased risk of a BoC policy error, and expect them to shift their monetary policy stance from neutral to stimulative in the coming days,” Naoum Tabet stated.

“It is highly likely that Canada may be entering an economic slowdown with gross domestic product growth potentially grinding to a halt in the coming months.”

The BoC’s now two-meeting pause on rate cuts puts “urgently needed” support for the economy on hold, according to CPA Canada. Chief economist David-Alexandre Brassard warns that waiting for clarity on the state of Canada-U.S. trade could come at a real cost.

“A pre-emptive rate cut would have sent a strong signal of support for a labour market already under stress,” he stated on Wednesday.

“Trade uncertainty is now a constant when dealing with the current U.S. administration,” Brassard added “Monetary policy must remain responsive. We cannot afford to always wait for clarity before acting.”

While the BoC stressed its commitment to setting its policy rate in accordance with incoming data in the months ahead, National Bank economists say Wednesday’s “dovish hold” signals cuts on the horizon.

“A July cut is more likely than not in our estimation,” Taylor Schleich and Ethan Currie wrote in a research note. “Nonetheless, a commitment to data dependence and a self-imposed inability to be forward-looking means the inter-meeting period could be volatile again.”

The Bank’s next rate decision is due on July 30.

“We’d highlight earlier comments from the Governor, when he explained they are ‘prepared to act decisively if incoming information points clearly in one direction,'” Schleich and Currie added on Wednesday. “To us, the data is already starting to point in one direction (i.e., towards growing economic slack) and that trend is set to continue.”

The BoC expects the economy will be “substantially weaker” in the second quarter of 2025, versus the start of the year, as the full impact of U.S. import tariffs hits Canadian businesses.

Étienne Bordeleau Labrecque, a Ninepoint Partners portfolio manager who previously worked as a researcher for the Bank, says the “stop-go nature of the trade war” has masked its effects thus far.

“It might take until September for the full impacts of the trade war to become evident,” he said in an email. “They might be tempted to hold until then.”

Desjardins Group economist Royce Mendes writes that the BoC “chose to kick the can down the road … in the face of still-elevated uncertainty,” but argued that “the rationale for holding rates steady today is already on shaky ground.”

A slowdown in U.S. imports in the latest data counters Macklem’s emphasis on the resilience of Canadian exports, Mendes argues. The BoC also pointed to higher spending on machinery and equipment in Q1 — which boosted GDP results — but Mendes says Statistics Canada attributed this to firms getting ahead of 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,” Mendes writes. “Overall, the domestic economy continues to look very frail.”

Desjardins still expects 75 basis points of cuts in 2025.

The BoC will need to press ahead with more rate cuts this year, barring a major breakthrough on Canada-U.S. trade, according to TD Bank senior economist Leslie Preston.

“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,” she wrote in a report following the Bank’s decision to hold its policy rate on Wednesday.

Canada’s central banks says there could be a need for a reduction if the economy weakens and inflation is contained. On Wednesday, policymakers predicted Canada’s economy will be “considerably weaker” in the second quarter of 2025.

The most “instructive” part of Macklem’s statement, writes BMO chief economist Douglas Porter, was a section detailing the discussion leading to the hold and what happens next.

Porter identifies “two key takeaways” from there. First, that “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.”

Second, that “the Bank will be driven by the data on hand (on growth and inflation), and not by forecasts, before they cut again.”

Still, Porter writes, if inflation slows and the economy also slows, a July cut remains quite possible. “While the forward-looking statement suggests that 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.”

BoC Governor Tiff Macklem says the wildfires raging in Western Canada, forcing mass evacuations, have already begun to singe the economy.

“These fires are having an economic impact,” Macklem told reporters on Wednesday. “It’s too early to give you an estimate. We will need to see. The situation is clearly pretty fluid. We’ll need to see what the damage is.”

This year’s wildfires have already burned 2.1 million hectares, according to the Canadian Wildland Fire Information System. The fire is reported to be so intense that plumes of smoke have blown across the Atlantic Ocean to Europe, affecting air quality a continent away.

“We are very much thinking about the peoples whose lives are being terribly impacted,” Macklem added. “We very much hope these fires are brought under control, and we thank and salute the brave firefighters who are doing their very best to do that.”

Earlier this week, oilsands producers Cenovus Energy and Canadian Natural Resources said they are removing workers and halting production.

Asked how the investor confidence suggested by the record-setting TSX is being interpreted by the BoC, deputy governor Carolyn Rogers was blunt. “We’ve been saying for a while … that the markets appear to be optimistic, that prices are pretty high.”

The Bank’s recent Financial Stability Report said that “markets look, at least in some sectors, to be priced to perfection,” Rogers noted. “So our advice or our comment on that really would just be you need to keep in mind the the level of uncertainty and the potential for volatility. We saw a huge bout of volatility in early April as a result of the sort of initial round of policy announcements out of the White House.”

The market didn’t show “dysfunction,” which was positive, Rogers said, in that it indicated the market’s capacity to deal with some volatility. “But we think that we’re not out of the woods yet on that volatility, that uncertainty — that could come back.”

The BoC says the impact of U.S. tariffs on inflation in Canada has yet to surface in the government’s consumer price index data, prompting policymakers to lean harder on “soft data” from talks with business owners.

“We’re doing more outreach than we normally do. We’re talking to businesses,” Senior Deputy Governor Carolyn Rogers told reporters in Ottawa on Wednesday.

“We’re putting a lot of weight right now on what we call soft data,” Governor Tiff Macklem added. “It’s difficult for us, but what I’m more worried about is, it’s difficult for businesses that are faced with new rules of the game every week.”

The BoC’s second consecutive rate pause puts Canada’s real estate market on track for a sluggish summer, according to industry experts.

“We are moving into what is traditionally one of the slowest periods of the year for home sales,” Rates.ca mortgage and real estate expert Victor Tran stated on Wednesday.

“We aren’t likely to see much change in activity during the summer, and what the fall brings will depend on many factors, including the results of the next Bank of Canada rate decision in July.”

Phil Soper, president and CEO of Royal LePage, says many buyers remain cautious due to an uncertain economy.

“In the country’s most expensive real estate markets, sales activity remains stalled, even as conditions increasingly favour buyers with more inventory and reduced competition,” he stated in an email.

Vanguard Canada senior investment strategist Ashish Dewan says the BoC will increase its focus on blunting the impact of U.S. tariffs on the economy, pushing its key lending rate to 2.25 per cent by the end of 2025.

“Canada’s outlook is increasingly uncertain following the U.S. administration’s potential decision to double tariffs on steel and aluminum imports and expand measures targeting the auto sector,” Dewan wrote in an emailed statement on Wednesday. “These developments are expected to weigh heavily on business investment, consumer spending, and employment.”

CIBC chief economist says BoC rate cuts are increasingly likely at the central bank’s July and September meetings, following Wednesday’s decision to hold the policy rate at 2.75 per cent.

“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,” Avery Shenfeld wrote on Wednesday. “The BoC will publish a detailed economic forecast to accompany that decision, and we look for a final quarter point reduction, to 2.25 per cent in September.”

On Canada-U.S. trade war uncertainty:

“The trade conflict initiated by the United States remains the biggest headwind facing the Canadian economy.”

“It is still too soon to see the direct effects of retaliatory tariffs in consumer price data.”

‘Unusual’ inflation volatility:

“[The] Governing Council will continue to assess the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure on inflation from higher costs.”

“There is some unusual volatility in inflation, but these measures suggest underlying inflation could be firmer than we thought. Higher core inflation can be partly attributed to higher goods prices, including food, and may reflect the effects of trade disruption.”

Economic weakness on the horizon:

“The Canadian economy is softer but not sharply weaker.”

“The pull forward in exports and inventory accumulation in the first quarter borrows economic strength from the future, so the second quarter is expected to be much weaker.”

A ‘clear consensus to hold’

“At this decision there was a clear consensus to hold policy unchanged as we gain more information.”

The BoC pointed to recent data in discussing its reasons to hold, noting some surprises in inflation and the economy.

“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.”

In the release, the BoC outlined a raft of conditions contributing to ongoing uncertainty

“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.”

Here are the latest data the Bank of Canada has to guide its interest rate decision this morning.

With the removal of the carbon tax in many Canadian provinces, inflation slowed to 1.7 per cent in April. But the BoC’s preferred core inflation measures, which strip out the effect of indirect taxes, rose — which BMO’s chief economist says suggests a “much less friendly” inflation picture.

CPI: 1.7 per cent (down from 2.3 per cent in March)

CPI-median: 3.2 per cent (up from 2.9 per cent in March)

CPI-trim: 3.1 per cent (up from 2.8 per cent in March)

Canada’s labour market saw flat job growth and a rise in the unemployment rate in April.

Jobs: Net gain of 7,400 jobs to Canada’s economy

Unemployment rate: 6.9 per cent (up 0.2 percentage points from March)

Canada’s economy showed some signs of weathering the uncertain trade climate in the first quarter of 2025. But economists had mixed readings of GDP data for the first quarter, even though it beat consensus forecasts.

Q1 2025 GDP: 2.2 per cent annualized growth (vs. expected 1.5 per cent growth)

March GDP: 0.1 per cent monthly gain (same as consensus)

Preliminary April GDP growth: 0.1 per cent monthly gain