By Max Sato
(MaceNews) – The Bank of Canada on Wednesday is largely expected to maintain its policy interest rate – the target for overnight lending rates – at a nearly neutral level of 2.75%, pausing for the second straight meeting until bank officials can figure out exactly how trade conflicts are hurting growth and boosting inflation.
At their previous meeting on April 16, BOC officials noted that the global and domestic economic prospects were still clouded by frequently changing punitive duties on many goods imports to the United States imposed by President Trump.
The decision to keep the benchmark rate just above what the bank considers neutral (2.25% to 3.25%) would follow 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 BOC remains one of the most aggressive rate cutters among major central banks, with a total of 225 basis point reductions (2.25 percentage points) so far during the current easing cycle.
The GDP data released Friday showed that the Canadian economy rose 2.2% annualized in the January-March quarter, weathering the early phase of the global trade war launched by Washington and outperforming some of its Group of Seven peers. Japan’s wobbly economy posted its first contraction in four quarters in Q1, down 0.7% annualized, hit by high costs of living and sagging real wages, while the U.S. economy slipped 0.2% for its first drop in three years, following a solid 2.4% expansion in Q4 led by rush imports ahead of stiff Trump tariffs.
The details of Canada’s Q1 GDP indicated some weakness: Consumption slowed, housing investment dropped and government spending dipped, but the monthly GDP data pointed to underlying strength. The advance reading for March was unrevised at a 0.1% gain and the flash estimate for April was also a resilient 0.1% rise, an indication that the 25% U.S. tariffs targeting the Canadian auto and metals industries as well as a minimum 10% duty on all U.S. imports have not yet had a full damaging impact.
Combined with sticky underlying 3% inflation in Canada, the solid GDP growth data should allow Bank of Canada policymakers to spend some more time analyzing the full drag from trade conflicts before resuming rate cuts.
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%.
“The key point here is that the GDP figures are sending no obvious distress signals so far in 2025,” BMO Capital Markets Chief Economist Douglas Porter wrote in a report. “While we can certainly quibble around the details, the Bank of Canada will surely seize on the headline outcome as well as the decent gain for April.”
“We continue to believe that this is not the end of the line for rate cuts, but we are officially pushing back our timing of those trims, to restart in late July, and perhaps stretching into early next year,” Porter said, adding that he and his team have penciled in a 25 basis point BOC 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.
“We are still circling the likelihood of a 2.0% end-point for the overnight rate, on the view that policy will need to be a bit below the neutral range amid the ongoing trade cloud,” Porter predicted.
CIBC Capital Markets Chief Economist Avery Shenfeld wrote in a report that “a forward-looking central bank should be looking past recent momentum in core inflation and could readily justify a rate cut this month,” adding that the monthly GDP gains have been slight and weak jobs data suggest a widening output gap.
“But while we would argue that a cut would be the right step, odds are that the Bank of Canada won’t deliver one just yet, having signaled that it’s less willing to be forward looking amidst considerable uncertainty over the outlook,” he said, projecting a pause on Wednesday “with a message that leaves the door open for rate relief ahead.”
Governor Tiff Macklem told reporters in April that bank policymakers look “symmetrically” at both upside and downside risks to its 2% inflation target. He also said while being less forward-looking than usual “until the situation is clearer,” bank officials are prepared to “act decisively” if incoming information points clearly in one direction. The bank is trying to ensure that first-round price increases from the cost hikes caused by stiff tariffs don’t spread to other prices and become ongoing inflation, he said.
Financial market participants also seem to believe the possibility of a June 4 rate cut is remote.
“I think the market has it about right, roughly a 25% chance of a cut,” BMO’s Porter told Mace News. “One could make a decent case for a move for sure, but the core CPI and the surprising resilience of GDP, and record highs in the TSX (Toronto Stock Exchange) all lean against it.”