Quick Takes:
- Core inflation is still above the two-percent target, so the Bank of Canada remains cautious even as headline prices fall.
- GDP growth and hiring have stalled, raising pressure for rate relief.
- Most economists now lean slightly toward no change; a Bloomberg survey shows that 17 of 30 expect a hold, compared to 13 who expect a cut.
Why did the Bank pause in April?
Headline inflation kept sliding, yet core prices stayed above the two-percent target and even firmed early in 2025. New U.S. tariffs lifted input costs and inflation expectations, so another rate cut would risk stoking demand just as supply shocks were pushing prices higher. Governor Tiff Macklem said the Bank must prevent tariff-related price spikes from becoming embedded. The Governing Council, therefore, held the overnight rate at 2.75 percent to reaffirm its commitment to price stability even as growth lost momentum.
Trade uncertainty reinforced caution. The April Monetary Policy Report outlined two stark paths: limited tariffs with near-trend growth, or a prolonged trade war that could tip Canada into recession and push inflation above three percent. With outcomes ranging from mild slowdown to stagflation, the Council paused to gather more precise data and keep its options open. Future moves will hinge on how growth, inflation, and tariff risks evolve.
Inflation trends: Headline vs. core CPI
Canadian inflation now presents policymakers with a mixed picture. Headline CPI fell to 1.7 percent year-over-year in April from 2.3 percent in March, dropping below the two-percent target for the first time in more than two years. Three forces explain the decline. Ottawa scrapped its consumer carbon tax on April 1, 2025, immediately shaving several tenths off the index. Energy helped too: gasoline is about 18 percent cheaper than a year ago, and natural gas prices are 14 percent lower. Finally, food inflation eased as global commodity prices retreated. The Bank expected headline CPI to be near 1.5 percent for the second quarter, so the April reading was no surprise, but it does give households welcome relief.
Core inflation, however, refuses to cooperate. Measures that strip out volatile and one-off items remain above target and are edging higher. CPI-Median climbed from 2.8 percent to 3.2 percent in April, its strongest reading since March 2024, while CPI-Trim reached 3.1 percent. These broad price pressures show domestic costs—wages, services, shelter—are still firm even as headline inflation slows. Core has hovered near three percent for six months, underscoring sticky underlying momentum.
The divergence complicates policy. Consumers see sub-two-percent inflation and expect further cuts, yet the Bank confronts core readings of more than three percent, which argue for caution. Officials believe headline CPI will stay subdued for several months because the carbon-tax effect will linger until next spring. They are far less confident about core prices, especially with new U.S. tariffs and supply-chain strains poised to raise costs for imported autos, appliances, and building materials later this year. The latest Business Outlook Survey already shows short-term inflation expectations drifting higher.
The Bank is therefore threading the needle—acknowledging that headline inflation is temporarily low while guarding against a re-acceleration driven by tariffs and expectations. Governor Macklem says tariff-related price spikes cannot be allowed to become embedded. Until core measures convincingly cool toward two percent, policymakers will keep additional easing on a short leash.
GDP growth and employment: A slowing economy
Canada’s late-2024 rebound has cooled. Real GDP fell by 0.2 percent in February—the first monthly decline since November—as mining, energy, and construction weakened. Some output was pulled forward in January when manufacturers rushed orders ahead of looming U.S. tariffs, then pared back. First-quarter GDP still grew 0.40 percent quarter-over-quarter, about 1.5 percent annualized, but consumer spending, business investment, and exports slowed. New U.S. duties on steel, aluminum, and autos are already cutting foreign sales, and the Bank of Canada warns a broader trade war could tip the economy into recession.
Labour data echo the slowdown. Canada lost 33,000 jobs in March and gained only 7,400 in April, lifting the unemployment rate to 6.9 percent—an eight-year high outside the pandemic. Manufacturing alone cut 31,000 positions in April as U.S. orders dried up; retail and wholesale trade also fell. The number of unemployed workers rose by 39,000 in April and is almost 14 percent higher year-over-year, while 61 percent of those jobless in March were still searching a month later. Wage growth for permanent employees is 3.4 percent, only marginally above inflation, pointing to slack rather than overheating.
These figures keep pressure on the Bank of Canada to ease policy. CIBC economists warn the labour market “could soon buckle,” supporting another cut, and the Bank has pledged to act “decisively” if conditions worsen. Even so, stubbornly high core inflation limits how far rates can fall, leaving the June 4th decision finely balanced between weak growth and persistent price pressures.
BoC commentary: Caution amid uncertainty
Governor Macklem says tariff turmoil forces the Bank to “change the way it conducts policy to become less forward-looking than normal.” Guessing wrong could “make matters worse,” so policy will rely on incoming data and “set policy that minimizes the risk.” Each meeting is live: if conditions “crystallize,” officials may “act quickly,” cutting for a severe downturn or holding if inflation heats up. Nothing is pre-committed.
The two-percent inflation target is non-negotiable. Macklem insists there is “no doubt” about that mandate. April’s statement pledged to keep Canadians’ “confidence in price stability” while supporting growth. Risks run both ways—tariffs can sap exports yet lift consumer prices—so policy must strike a balance.
Monetary policy cannot erase trade uncertainty, but it can steady demand. April’s pause showed the Bank will not slash rates simply because growth softens if price pressures linger. Forward guidance stresses vigilance and readiness to “proceed carefully” as each new data point arrives.
Market expectations for June 4th: A close call
Odds of a cut or a hold are nearly even and shift with every data release. After weak March jobs numbers, swaps put the chance of a 25-basis-point cut above 55 percent, and the two-year yield slipped to the mid-2.50-percent range. Some forecasters, including Capital Economics, still expect the overnight rate to reach 2.00 percent by late 2025.
Momentum shifted on May 20th. Core inflation above three percent trimmed the implied June-cut probability to roughly 40 percent. Most economists now lean slightly toward no change; a Bloomberg survey shows 17 of 30 expect a hold. A 90-day U.S. tariff delay announced in April reduced near-term risk and nudged markets toward patience. Even so, a fresh trade flare-up or weak data could flip expectations again.
Beyond June, investors broadly assume more easing. The two-year yield of around 2.60 percent already sits below the 2.75 percent overnight rate, signaling future cuts. Markets and economists alike expect the policy rate to end 2025 in the low-two-percent range, but whether the next move comes in June, July, or later depends on how growth and inflation change.