Central bank makes crucial call amid inflation fears and gathering storm clouds over Canada's economy
The Bank of Canada has opted against cutting interest rates in June, holding its benchmark rate steady amid concern over a potential inflation uptick in the months ahead.
The central bank said on Wednesday morning it was leaving the overnight rate, which leads variable mortgage rates in Canada, unchanged at 2.75% – the second time in a row it’s kept rates at their current level after also holding in April.
The decision had been viewed as a close call by observers, although expectations ticked in the direction of a hold after last week’s gross domestic product (GDP) reading showed the economy had performed better than expected in the first quarter.
Statistics Canada said on Friday (May 30) that the economy expanded by 2.2% in the opening three months of the year, higher than the 1.7% growth expected by economists, even though that was spurred in large part by US buyers rushing to bring in exports ahead of the Trump administration’s tariff wave.
Meanwhile, core inflation measures remained sticky in April despite a drop in the headline consumer price index (CPI) to 1.7%. Core prices, which exclude volatile food and energy costs, were up by 0.4% compared with March, an unwelcome sign for the central bank as it looks to avoid a repeat of the sharp 2022 uptick in inflation triggered in part by rate cuts.
While the Bank’s benchmark rate has fallen seven times since this time last year, it’s clearly moved into a wait-and-see mode as it weighs up how the trade war sparked by those Trump tariffs impacts the Canadian economy in the months ahead.
US trade policy has been marked by unpredictability and shifting language since Trump first pushed ahead with huge levies on Canadian imports in the first quarter, but analysts have highlighted the potentially huge threat they could pose to Canadian jobs this year.
This week, the Organisation for Economic Co-operation and Development (OECD) said it was expecting Canada’s growth forecast to slide to 1% this year and 1.1% in 2026, and economists still anticipate Bank of Canada cuts before the end of the year despite today’s hold.
The OECD expects the Bank’s policy rate to hit the 2.25% mark in 2025 through cuts totalling 50 basis points, while other observers including Bank of Montreal (BMO) economists believe it will fall to 2%.
The central bank will be keeping a keen eye on economic data including the inflation and growth outlooks between now and its next decision, scheduled for July 30 – when it’ll also release its Monetary Policy Report, signalling how it’s assessing on the economic landscape looking ahead.
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