The Bank of Canada announced today that it is keeping its benchmark interest rate at 2.75%, unchanged from April (and March) of 2025. As noted under “Rationale”, the Bank appears to be in a holding pattern until it gains more information on the direction of US trade policy and its impact on Canada.
Below, we summarize the Bank’s observations and its outlook.
Canadian Economic Performance, Housing, Employment and Outlook
- Economic growth in the first quarter came in at 2.2%, slightly stronger than the Bank had forecast, while the composition of GDP growth was largely as expected
- The pull-forward of exports to the United States and inventory accumulation boosted activity, with final domestic demand “roughly flat”
- Strong spending on machinery and equipment held up growth in business investment by more than expected
- Consumption slowed from its very strong fourth-quarter pace, but continued to grow despite “a large drop” in consumer confidence
- Housing activity was down, driven by a sharp contraction in resales; government spending also declined
- The labour market has weakened, particularly in trade-intensive sectors, and unemployment has risen to 6.9%
- The economy is expected to be considerably weaker in the second quarter, with strength in exports and inventories reversing and final domestic demand remaining subdued
Canadian Inflation
- Inflation eased to 1.7% in April, with the elimination of the federal consumer carbon tax shaving 0.6 percentage points off the Consumer Price Index
- Excluding taxes, inflation rose 2.3% in April, slightly stronger than the Bank had expected
- The Bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up
- Recent surveys indicate that households continue to expect that tariffs will raise prices and many businesses say they intend to pass on the costs of higher tariffs
- The Bank will be watching all of these indicators closely to gauge how inflationary pressures are evolving
Global Economic Performance
- While the global economy has shown resilience in recent months, this partly reflects a temporary surge in activity to get ahead of tariffs
- In the United States, domestic demand remained relatively strong but higher imports pulled down first-quarter GDP
- US inflation has ticked down but remains above 2%, with the price effects of tariffs still to come
- In Europe, economic growth has been supported by exports, while defence spending is set to increase
- China’s economy has slowed as the effects of past fiscal support fade; more recently, high tariffs have begun to curtail Chinese exports to the US
- Since financial market turmoil in April, risk assets have largely recovered and volatility has diminished, although markets remain sensitive to US policy announcements
- Oil prices have fluctuated but remain close to their levels at the time of the April Monetary Policy Report
Rationale
With uncertainty about US tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, the Bank’s Governing Council decided to hold the policy rate steady “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.”
Looking Ahead: Uncertainty Remains High
The Bank noted that since its 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 Bank said 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.
As a result, the Bank says it is proceeding carefully, with particular attention to the risks and uncertainties facing the Canadian economy. These include: the extent to which higher US tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve.
Final comments
Today’s announcement ended with the following statement from the Bank’s Governing Council: “We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. We will support economic growth while ensuring inflation remains well controlled.”
Next scheduled BoC rate announcement
The Bank is scheduled to make its fifth policy interest rate decision of 2025 on July 9th. First National’s executive summary will follow that announcement. In the meantime, please visit the Resources page of this website for other important insights.