The Bank of Canada held its policy interest rate at 2.75 per cent on Wednesday as it contends with tariff uncertainty, elevated core inflation and the country’s stronger-than-expected economic growth in the first quarter.
Although the policy rate remains steady, the bank’s statement was decidedly dovish. While inflation expectations remain near the 2 per cent target, the Bank of Canada is prepared to cut rates further should economic conditions deteriorate.
Two more rate cuts are still expected this year to bring the policy rate to terminal at 2.25 per cent. This scenario remains the base case.
A rate cut in July is certainly possible, but it will depend on job numbers, core inflation and developments related to U.S. tariffs—particularly when it comes to trade negotiations with Canada.
The Bank of Canada’s primary goal is to maintain price stability as a source of confidence to guide the economy through this period of global upheaval. To this end, it will need to balance two opposing forces influencing inflation: the upward pressures from tariffs and subsequent trade disruptions and the downward pressures from a weaker economy.
The largest threat to Canada’s economic outlook remains U.S. tariffs. While these duties are much higher now compared to the beginning of this year, the details of the tariffs themselves appear to change on a frequent basis.
U.S. tariffs on Canadian goods remain relatively lower than those on other countries as the U.S. rolled out wider, global tariffs in April. Canadian businesses also have the option to make their goods compliant with the countries’ current free-trade agreement to avoid tariffs.
However, the recent increase in U.S. tariffs on global steel and aluminum imports from 25 per cent to 50 per cent is a concern for Canadian manufacturers and dependent industries.
Canada’s economy has shown some resilience, but it is expected to contract in the second and third quarter after slightly outperforming in the first due to businesses pulling forward orders earlier this year.
That first-quarter momentum will not last now that tariffs are in effect and businesses are pulling back after filling orders. While industries insulated from trade haven’t borne the brunt of tariffs, many businesses have indicated they would pause or reduce hiring due to this ongoing uncertainty.
At the same time, consumers sentiment in Canada, the U.S. and globally is souring, leading to lower spending.
In response, businesses need to find new suppliers and customers, divert or alter their supply chains and forge new relationships—all of which will result in at least a one-time price increase.
While uncertainty will be the theme going forward, the Bank of Canada could consider cutting its policy rate next month if core inflation softens and economic activity shows more downward momentum.
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