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Rates Unchanged as Bank Treads Carefully

Canadian Economics

By: Walter Bolduc

The Bank of Canada holds rates.

  • The Bank of Canada held its target for the overnight rate at 2.75 per cent, the Bank rate at 3.0 per cent, and the deposit rate at 2.70 per cent.
  • Uncertainty surrounding trade with the U.S. remains high. While the Canadian economy has softened, the Bank is treading carefully amid trade-related inflationary risk.
  • The global economy has been resilient due to stronger demand as importers try to get ahead of tariffs. China’s economy is slowing as the effects of past fiscal support fades. U.S. inflation slowed but remains above 2.0 per cent. The impact of tariffs on U.S. inflation are still coming.
  • Canada’s economy recorded annualized growth of 2.2 per cent in the first quarter, aided by a notable pick-up in exports to the U.S. — ahead of possible tariff implementation. Domestically, consumer spending growth slowed, but remained positive despite weak consumer confidence. Housing resale activity and government spending were lower in the first quarter.
  • Unemployment rose to 6.9 per cent in April, spurred by a weakening of the labour market in trade-intensive sectors.
  • Second quarter economic growth is expected to be significantly weaker with fewer exports and weaker domestic demand.
  • April’s inflation cooled to 1.7 per cent following the elimination of the consumer carbon tax. Excluding the tax, inflation rose to 2.3 per cent, slightly outpacing expectations. While headline inflation fell, core inflation measures all rose in April, some above three per cent. Households indicated they still expect tariffs to raise prices and businesses have signalled that the costs of tariffs would be passed on.
  • The Bank will support economic growth, but its primary focus is controlling inflation and ensuring that confidence in price stability is preserved. The Bank is paying particular attention to the risks and uncertainty facing Canada’s economy, especially that arising from disruption to trade with the United States.

Insights

Stronger than expected growth gives the Bank of Canada some breathing room. The first quarter of 2025 outperformed expectations, with GDP rising 0.5 per cent on the previous quarter. GDP per-capita also increased for the second quarter in a row. First quarter growth was driven by exports, with U.S. businesses seeking to get ahead of potential tariffs. Domestically, household consumption held up reasonably well when considering that consumer confidence hit a record low in March. An early estimate from Statistics Canada shows that the Canadian economy expanded 0.1 per cent in April, continuing the trend of stronger than anticipated growth. The resilience of the Canadian economy in recent months has allowed the Bank of Canada to delay its next rate cut until more clarity emerges surrounding the trade situation.

Inflation remains in check for the time being. In April, consumer prices rose 1.7 per cent, thanks in part to weaker energy prices (-18.1 per cent). The removal of the consumer portion of the carbon tax mixed with greater supply of oil from OPEC+ countries were the main drivers of this decline. Also helping to ease inflation was a strengthening of the Canadian dollar, which helped to ease price pressure on imports from the United States. We expect inflation to remain within target, but still-sticky inflation expectations and the prospect of businesses passing through tariff costs to consumers are a present risk.

High uncertainty prompts the Bank to take a “wait-and-see” approach. Frequently shifting U.S. trade policy continues to stoke uncertainty among businesses and consumers in Canada and around the globe, making it difficult to predict how the economy will perform in the months ahead. Just when it seemed like the U.S. administration was softening its tone on trade policy, President Trump signed an executive order on June 3rd, 2025, to double tariffs on foreign steel and aluminum to 50 per cent. With no resolution to the trade dispute in sight, the Bank of Canada has decided to tread carefully ahead of making further changes to its policy interest rate.

To learn more about Canada’s place in a rapidly changing global landscape, see our latest research and analysis in the “Canada in a Changing World” series.

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