Bank of Canada Interest Rate Announcement (June 4, 2025)

Bank of Canada holds rates steady, offers more forward guidance 

• The Bank of Canada (BoC) held its policy rate at 2.75% for the second consecutive announcement. 
• In justifying its stand-pat decision the Bank pointed to tariff uncertainty remaining high, the economy is softer, but not sharpy weaker, and there has been some unexpected firmness in inflation. In their calculus these changes netted out to keeping a wait-and-see approach in place as they wait for more information on U.S. trade policy and its impacts. 
• In more detail, the Bank stated that first quarter economic growth in Canada was above their expectation, but that the composition of growth was basically as expected. They also pointed out that despite softer headline inflation, their preferred measures of inflation have moved up. 
• Looking forward the Bank expects the economy to be "considerably weaker" in the second quarter as the strength in exports and inventories reverse, and domestic demand remains "subdued".
• The forward-looking language on "proceeding carefully" and the risks they are balancing remained unchanged. However, they dropped the comment that monetary policy cannot offset the impacts of a trade war. Instead, focusing on ensuring "price stability through this period of global upheaval" and adding that they will "support economic growth while ensuring inflation remains well controlled".

Key Implications

• As markets expected, the Bank of Canada left interest rates unchanged today. At its April decision the BoC said that they would proceed carefully with attention to the risks and uncertainties. Since then, the private sector shed jobs in back-to-back months, demand in the domestic economy came to a halt in the first quarter, and the housing market remains soft. However, core inflation pressures also picked up above 3%, putting the BoC in a bind. Given there isn't any more certainty on tariffs than there was in April, there was a clear consensus among Governing Council to hold policy unchanged as they gained more information. 
• Looking ahead though, members of Governing Council thought there could be a need for a reduction in the policy rate if the economy weakens and inflation is contained. But, that the Bank is being less forward looking than usual given the high degree of uncertainty on what the tariff picture looks like. 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.

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