Central bank faces a 'very close call' as it weighs up whether to slash rates amid economic storm clouds but stubborn inflation
Analysts have been torn for weeks on whether the Bank of Canada will be cutting interest rates in its June decision, with the central bank weighing upside risks to the inflation outlook against grave threats to the Canadian economy in the shape of US tariffs.
The Bank trimmed its benchmark rate in each of its opening two announcements of the year, although it tapped the brakes on cuts in April – ending a run of seven straight reductions stretching back to June of 2024.
Its June decision, set to go public at 9:45 EST tomorrow morning (June 4), will be a “very close call,” according to Alberta Central chief economist Charles St-Arnaud (pictured top), who told Canadian Mortgage Professional the latest news on inflation likely spells cause for concern for decision-makers.
While the headline inflation rate slipped to 1.7% in April, core prices posted a surprise increase – and Canadian counter-tariffs on US imports could potentially inflame that pressure further.
“We’ve seen the labour market underperforming in recent months and it seems like economic weakness is probably slightly more important, but if you look at the latest inflation report, inflation has been much more persistent and inflation pressures have been more broad-based than what they expected,” St-Arnaud said.
“[Bank officials] will be concerned with that, especially as they probably have a bit of PTSD from 2022 and 2023 and the spike in inflation. So they probably still have that fresh in their mind and are really concerned of repeating similar mistakes.”
Meanwhile, Statistics Canada said last week the economy expanded at a faster rate than economists had expected in the opening months of the year, growing by 2.2% in the first quarter in another development that could keep rate cuts on the shelf for now.
Royal Bank of Canada (RBC) economists Abbey Xu and Nathan Janzen said that news means “a second consecutive hold on the overnight rate looks more likely than a cut at this stage,” while Bank of Montreal (BMO) economists also changed their expectations for the Bank’s June decision to a hold.
Canada’s economy grew 2.2% in Q1, beating forecasts, per Statistics Canada. RBC’s Nathan Janzen and Abbey Xu said the stronger data supports holding rates next week, while BMO’s Doug Porter sees a July cut as more likely. https://t.co/XVRdvsmJJc?
— Canadian Mortgage Professional Magazine (@CMPmagazine) May 30, 2025
Don’t count on a return to rock-bottom interest rates
While economic crises are often accompanied by a steep fall in rates, such as during the 2007-08 global financial meltdown and the COVID-19 pandemic, the present situation differs sharply from those times, St-Arnaud said.
“The current environment is very different from what we had during previous shocks. During the pandemic and the global financial crisis there was only one direction for interest rates,” he said. “The shock was 100% deflationary, so interest rates could be driven to zero.
“But now, even if you have a relatively important downturn, it’s not clear that the Bank would be in a situation to be aggressive on cutting interest rates.”
Most analysts still expect the central bank to introduce at least a couple of rate cuts between now and the end of the year as the economy sags under the weight of the US trade war. But St-Arnaud said that fresh inflationary risk means there’s little chance of the Bank cutting as deeply as originally expected by January.
‘For now, it seems much harder for the Bank to cut more’
The Bank’s current policy rate is 2.75%, but “it’s very hard to see them being able to cut much deeper than 2% by the end of the year because of all the inflationary pressure that could happen,” St-Arnaud said. “There are other structural factors that could push it lower. But for now, it seems much harder for them to cut more.”
That could have big implications for the mortgage market. It would mean variable rates wouldn’t slide much from their current levels in the months ahead while fixed rates, despite dipping at the end of last week, have jumped over the last month as bond yields climbed.
“The way I see it is that mortgage rates are probably nearly as low as they will be,” St-Arnaud said. “They might be slightly lower later on this year, but we’re not going to go to deep discount, extremely low mortgage rates as we’ve seen in previous economic downturns and definitely not back to where we were during the pandemic.”
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