Bank of Canada today set its benchmark interest rate at 2.75%, citing that the Canadian economy is “soft but not weak” and that inflation data remains chaotic.
But a more obvious shift beyond the decision to keep things stable is the tone: banks are retreating from their predictions and tending to incoming data to guide their next move.
“Because U.S. tariffs remain high… the Board of Management decided to hold policy interest rates,” the bank said in a statement.
Although the decision itself is widely expected, economists are still paying attention to what banks are not saying. It removed earlier language about monetary policy restrictions in the trade war, but emphasized a more reactive position—a waiting for hard data rather than turning to expectations.
Gov. Tiff Macklem said in his opening remarks that “there are more perspectives.” “In general, members believe that if the economy weakens … and the cost pressure on inflation, it may be necessary to lower policy interest rates.”
Data exceeds direction
After the decision, several economists marked a more cautious wait and see.
“The bank’s tax rate decisions and comments are right in the middle of the intraday trading,” said Douglas Porter of BMO. “While the forward-looking statement shows that the Council is not eager for further cuts, we suspect that the combination of gentle activities and mild core inflation trends will prompt other actions.”
Porter also noted that the bank’s explicit recognition it was “more forward-looking than usual”, a rare and intentional shift that reflects the difficulties in modeling the impact of tariffs and global trade tensions.
Claire Fan, an economist at RBC, added that growth in strong GDP in Q1 could swell due to a “tariff frontline operation” (an rush to ship goods before shipping on expected tariffs), meaning weaker activity could be shown in the second quarter. “We believe that the BOC’s path will depend to a large extent on the extent to which the economy will soften further,” Fan wrote.
Andrew Grantham of CIBC said the bank “keeps the powder dry” while still maintaining bias. He expects that assuming inflation data calm and labor market weaknesses build up, he will lower the benchmark by 25 in July.
“While we can’t oppose the acceleration of the core measures of inflation, we do think that this is due in part to retaliatory tariffs, especially in areas such as food that happens quickly through the pass,” he noted.
Watch inflation and employment
Although the title CPI fell to 1.7% in April, the bank noted that core inflation had increased, and businesses reported that they planned to pass tariff-related costs. The federal carbon tax cut was deprived of the rate of inflation at 2.3%, higher than banks expected.
Meanwhile, labor market conditions have been alleviated, and job losses are concentrated in trade exposure areas such as manufacturing and wholesale. Unemployment has risen to 6.9%, and further signs of weakness in Friday’s job report could increase pressure on action next month.
“The outlook for consumers and businesses is very cautious, but spending and activity mostly continues,” Porter said. “This tension makes it difficult to draw the path.”
What’s next?
By the end of the summer, the market is still betting at least. Economists generally agree that the July 30 decision will depend on two things: whether inflationary pressures show signs of cooling, and whether slackness in the labor market continues to be established.
“We expect there will be enough evidence to accumulate slack in the economy and that core inflation is affected by retaliatory tariffs, allowing policymakers to comfortably reduce their comfort rate in July,” Grantham wrote.
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Last modified: June 4, 2025
