The Bank of Canada once again hit the pause button on interest rate cuts, choosing not to add more support to the economy despite recent concerns of a recession in the face of U.S. tariffs.
There was a clear consensus among policymakers to keep the bank’s key interest rate at 2.75 per cent in June while they wait for more information on the impacts of U.S. trade policy, bank governor Tiff Macklem said in a press conference on Wednesday alongside senior deputy governor Carolyn Rogers.
“The trade conflict initiated by the United States remains the biggest headwind facing the Canadian economy,” Macklem said, adding the economy is “softer but not sharply weaker” and that the likelihood of an extreme global trade war has lessened since April with the U.S. and China significantly lowering each other’s tariffs.
The main challenge before central bankers is keeping inflation under control without inducing greater economic pain than necessary through elevated borrowing costs.
The governor emphasized that the bank will be looking carefully at upcoming inflation reports before the next decision in July, given recent signs of inflation heating up.
“What we’re hearing from firms is that the trade disruption is already adding costs. They’re looking for new suppliers. They’re developing new markets,” Macklem said. It is not so clear, however, how Canada’s counter-tariffs have been impacting consumer prices.
Central bankers had different views when discussing the bank’s next decision on July 30, but they did not rule out the possibility of a cut.
“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,” said Macklem.
Later, he said that this isn’t supposed to be interpreted as official forward guidance, but rather just a comment on discussions between central bankers.
Several experts had forecasted the bank would be standing pat on Wednesday after gross domestic product data for the first quarter of 2025 came in surprisingly robust last Friday.
As of Tuesday afternoon, markets were predicting a 73 per cent chance of a pause and a 27 per cent likelihood of 0.25 percentage-point cut, according to data supplied by the London Stock Exchange Group.
In April, the bank also took a wait-and-see approach, keeping the rate unchanged at 2.75 per cent for the first time following seven consecutive cuts.
Some economists believe the bank will need to provide more support to the economy down the line as tariffs are actively hurting business and consumer spending. Canadians are also having a tougher time in the labour market, with the April unemployment rate reaching the highest level since November.
And, while a federal court is trying to stop U.S. President Donald Trump from imposing sweeping tariffs, the American president just hiked steel and aluminum levies to 50 per cent as of 12:01 a.m. Wednesday.
“We expect that barring a trade negotiation miracle with the Trump administration, Canada’s economy is likely to tip into recession this year, and more interest rate cuts will be required,” TD economist Leslie Preston wrote in a note to clients on Wednesday.
Royce Mendes, economist at Desjardins, believes the bank could be forced to cut rates another 75 basis points this year.
The bank is expecting to resume providing an official forecast for the economy next month, said senior deputy governor Rogers.
