What comes next for interest rates?
Canada’s economy declined 0.1% in April, reversing gains from the previous month as US tariffs continued to weigh on economic activity. The contraction fell slightly below economists’ expectations of flat growth and marked a reversal from March’s 0.2% expansion.
The economic decline was attributed to a 0.6% drop in goods-producing industries, which represent 25% of Canada’s gross domestic product. Manufacturing recorded a significant decline, with durable goods production falling 2.2%.
“The weakness has mainly affected the manufacturing sector, while the rest of the economy has been more resilient,” said Charles St-Arnaud, chief economist at Alberta Central. More than half of industries recorded growth during April, but manufacturing losses offset these gains entirely.
Statistics Canada’s preliminary data indicates another 0.1% contraction in May. Several economists project Canada’s economy will contract modestly in the second quarter following 2.2% growth in the first quarter.
“Q2 GDP is now tracking a modest 0.3% contraction which is between the two scenarios the Bank of Canada laid out,” said Andrew Grantham, senior economist at CIBC.
Interest rate cut uncertain
Money markets currently assign 35% odds of a rate cut at the Bank of Canada’s July 30 meeting, a report from Morningstar noted. The central bank has held its policy rate at 2.75% since April after seven consecutive cuts, including two earlier this year.
However, economists remain divided on the likelihood of immediate rate relief. Core inflation stands at 3%.
“The central bank has made it clear that it is more focused on current inflation than on economic weakness,” St-Arnaud noted. “We think the Bank of Canada is more likely to stay on the sidelines unless inflation eases further.”
Trade war impact timeline disputed
Tony Stillo of Oxford Economics stated April marks “the beginning of a trade war-induced recession that will likely stretch through the end of 2025, unless a US-Canada trade deal is reached.”
Clair Fan of Royal Bank of Canada said the bank expects “the pain from trade uncertainties will stay relatively contained, leaving the economy softer but not substantially worse off.”
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The Bank of Canada’s next decision will likely hinge on upcoming employment data and the July inflation report, with policymakers weighing persistent economic slack against stubborn core inflation pressures.
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