–BOC Keeps Policy Rate at 2.75% After 7 Rate Cuts Totaling 225 Basis Points from June 2024 Until March 2025
–Governor Macklem: Only Forward Guidance Is: ‘Proceeding Carefully,’ Less Forward-Looking Than Usual
–Mackem: CAD Weakness Lifted Import Costs but Recent Rebound to 72-73 Cents Vs. USD Should Reverse It
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday maintained its policy interest rate – the target for overnight lending rates – at a neutral level of 2.75%, pausing for the second straight meeting in the current easing campaign launched nearly a year ago, citing stickier-than-expected core inflation and resilient economic growth.
The panel of seven policymakers at the bank reached a “clear consensus” over holding rates at this point (they don’t vote) but they were divided over whether the bank should continue cutting rates to shield the economy from the impact of trade rows, Governor Tiff Macklem said, repeating his April remarks that Governing Council is “proceeding carefully” and “being less forward-looking than usual.”
Among the risks and uncertainties closely monitored by the bank are: the extent to which higher U.S. 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.
“With uncertainty about U.S. tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, Governing Council decided to hold the policy rate as we gain more information on US trade policy and its impacts,” the bank said in a statement. “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.”
“At this decision there was a clear consensus to hold policy unchanged as we gain more information,” the governor said in his opening remarks at a post-meeting news conference.
On the future path for the policy interest rate, Macklem said “there was more diversity of views,” but concluded, “On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued U.S. tariffs and uncertainty, and cost pressures on inflation are contained.”
Macklem offered no specific CPI numbers or conditions that could prompt the rate-setting board to consider a rate cut when asked what he meant by cost pressures being “contained.” He said this paragraph from his statement should not be interpreted as forward guidance but that it was part of the deliberations by Governing Council members.
“The only forward guidance we can give you is…given the unusual level of uncertainty, we are preceding carefully and that means we are being less forward looking than usual,” he said.
“It’s tough to pin down a precise number on inflation where they would be more comfortable, but I suspect it requires a bare minimum of core either being in the target zone (1% to 3%) or fading — and core did neither in April,” explained BMO Capital Markets Chief Economist Doughlas Porter.
“In a nutshell, I think they need comfort that inflation is likely to be within their target zone in the year ahead. It’s not obvious that it will be at the moment,” he told Mace News.
The year-on-year increase in Canadian CPI decelerated to a seven-month low of 1.7% in April from 2.3% in March in light of the removal of the consumer carbon tax on April 1 and a sharp drop in global crude oil prices. But the Bank of Canada’s two main measures of core inflation both popped above 3%, with trim rising to 3.1% from 2.9% and median surging to 3.2% from 2.8%.
Porter expects the BOC to conduct a 25 basis point rate cut each on July 30, Oct. 29 and in January 2026, all dates that come with its Monetary Policy Report that provides the bank’s medium-term growth and inflation outlook with risk analysis.
In its annual review of what it considers an overnight interest rate that is neutral to economic activity, the bank left its estimate unchanged in a range of 2.25% to 3.25% in April. “It (the current policy rate) is right in the middle at this point, but if the economy is really struggling with tariffs, there is a real chance they could take the rate below the neutral range to support the economy,” Porter predicted.
Aked about what the bank said about “being prepared to act decisively if incoming information points clearly in one direction” in its April 16 statement that was absent from the latest one, the governor told reporters not to read too much into it.
In its previous decision in April, the bank also stood pat amid extremely high uncertainty at the initial phase of trade war storm. That followed moderate 25-basis point rate cuts, in March and January, two consecutive 50-basis point slashes, in December and October, and three 25-basis point cuts since June when the bank began unwinding the effects of its past aggressive tightening.
“The CPI ex-tax moved up in April, and more significantly, if you look at our preferred measures of core, in fact if you look at a range of alternative measures of core … distribution pricing, it’s a percentage above 3%,” the governor said. “You can see that they all moved up in April. That has got our attention.”
There is some high month-to-month volatility in CPI data components including traveling costs, he said, “So you don’t want to over-rotate one month’s CPI number but the fact that quite a number of measures of core or alternative measures of core all moved up doses make you think that underlying inflation could be firmer than we thought.”
Bank officials have been monitoring both the downward pressure on inflation coming from weaker economy and the upward pressure arising from higher costs, Macklem said. “We will have to factor all of that in July.”
Officials will digest two more CPI reports for May and June before their next policy decision on July 30. CPI data have not yet shown any impact of retaliatory tariffs imposed by Ottawa on imports from the United States, Macklem said.
To assess the impact of the trade conflicts, BOC officials are holding more outreach meetings with Canadian firms, gleaning information about their moves to look for new suppliers and carry higher inventories and their outlook for costs. Senior Deputy Governor Carolyn Rogers told reporters. “We are really putting a lot of weight right now on soft data.”
The governor said the Canadian dollar’s rebound to US$ 0.72 to 0.73 cents to the U.S. currency in recent trading should reverse the effects of the earlier depreciation of the CAD to US$0.68 to 0.69 that pushed up import costs.
But BMO’s Porter expects fluctuations in the foreign exchange market to have little impact on what the Bank of Canada is going to do next.
“In the past 20 years, the impact of Canadian dollar movements on inflation has been much less important than in prior decades,” he said. “So, while the currency still has some bearing on the bank’s decisions, it definitely does not play an outsized role.”
“They are also wary of dramatic moves in the currency, especially to the downside, but I wouldn’t describe its behaviour in the past few years as being dramatic,” he said, pointing that for every 10% depreciation in the CAD (US$ gets 10% more expensive), Canadian inflation is roughly 0.8 percentage point higher than in the U.S.
On broader Canadian policy, Macklem blamed Canadian firms’ heavy reliance on the U.S. market for the fragile aspect of the economy, making an excuse that major buyers of their goods and services are located just south of the border. It is their weakness that politicians and business leaders have been discussing for more than a decade but nothing decisive has been done about, he said.
“This experience (being hard hit by Trump tariffs) underlines the need to diversify our trade to overseas markets,” he said. “It also underlines the opportunity to do a better job of developing our internal Canadian market. If we can substantially, comprehensively reduce inter-provincial trade barriers and at the same time improve east-west transportation, there is a potential to have more trade within the country and grow our internal market, instead of relying as much on north-south trade.”
The Canadian economy is “still a moving target,” standing “somewhere” between the bank’s optimist and pessimistic scenarios provided in its quarterly Monetary Policy Report in April, Mackem said, although the likelihood of the latter (an extreme, protracted severe trade war) “does appear to have come down somewhat” since then. Beijing and Washington have stepped back from imposing extremely high tariffs on each other and the U.S. has been in trade talks with Canada and other key trading partners, he added.
In Scenario 1, bank officials assume most of the new tariffs get negotiated away, but the process is unpredictable, and businesses and households remain cautious. GDP growth in this scenario stalls in the second quarter, then expands only moderately. Inflation drops below the 2% target for the rest of 2025 and into 2026, both because of the end of the consumer carbon tax and a weak economy.
In Scenario 2, they assume a long-lasting global trade war. The economic consequences are severe. Canada’s GDP contracts in the second quarter and the economy is in recession for a year. Growth gradually returns in 2026 but remains soft through 2027 as U.S. tariffs permanently reduce Canada’s potential output and lower our standard of living. Inflation rises above 3% in mid-2026 as tariffs, countermeasures and shifts in supply chains raise costs, pushing up many prices. Inflation then eases as weak demand limits ongoing inflationary pressures.