- Randall Bartlett
Deputy Chief Economist
Essentials of Monetary Policy
The Bank of Canada Holds Rates Steady in June, but Timing Is Everything
June 4, 2025
According to the Bank of Canada (BoC)
- In line with the widely held view of economists and markets, the BoC maintained the overnight policy rate at 2.75% today.
- The long shadow of US tariff uncertainty hung over the rate announcement. Since the April Monetary Policy Report (MPR), the on-again, off-again tariff threats have provided little in the way of clarity on the direction of the economy. As such, according to the press release External link. that accompanied the rate decision, “Governing Council decided to hold the policy rate as we gain more information on US trade policy and its impacts.” Indeed, as Bank of Canada Governor Tiff Macklem said in his opening statement External link., “At this decision there was a clear consensus to hold policy unchanged as we gain more information.”
- The Bank clearly recognized that cracks in the Canadian economy are showing. The surge in trade flows in Q1 2025 reflected inventory building ahead of tariffs both at home and abroad. While business investment was strong, this too likely borrowed from the future as trade uncertainty mounts. Despite this strength, final domestic demand slumped in the quarter as the rest of the Canadian economy limped along, and Q2 is expected to be much weaker. The unemployment rate’s gradual grind higher reflects that weakness.
- Despite this, Governing Council felt inflationary pressures were still too firm to warrant a rate cut at this time. While headline eased to 1.7% y/y in April, the BoC chalked 0.6 percentage points of this up to the elimination of the price on pollution. Indeed, inflation rose by 2.3% in the month when taxes are excluded. The Bank’s measures of core inflation have also moved up (graph 1), as did the central bank’s latest surveys of inflation expectations in Q1.
Implications
In central banking, as in comedy, timing is everything. The Bank of Canada’s Governing Council recognized that the Canadian economy is slowing and is likely to slow further ahead. But given the uncertainty of US trade policy, it can’t know which of the two scenarios it published in its April 2025 MPR—resolution of trade tensions or all out trade war—is more likely. The forecast in our latest Economic and Financial Outlook External link., updated for the most recent Q1 data, falls in the middle of these projections (graph 2).
What the Governing Council does know right now is that inflation is too high for their comfort. And given that slower growth resulting from trade tensions will take time to feed into underlying inflation, they opted to keep the overnight rate unchanged in June. Indeed, “Governing Council will continue to assess the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure on inflation from higher costs.” We continue to expect that the Bank of Canada will cut rates another 75 basis points this year.
2025 Schedule of Central Bank Meetings
