| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| Change | 0bp | -25bp to 0bp | 0bp | 0bp |
| Level | 2.75% | 2.50% to 2.75% | 2.75% | 2.75% |
Highlights
For the second consecutive time, the Bank of Canada held its key policy rate unchanged at 2.75 percent, as expected, noting that the Canadian economy has softened but not weakened sharply, while inflation has shown some unexpected firmness.
With uncertainty about U.S. tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, Governing Council decided to hold the policy rate as we gain more information on U.S. trade policy and its impacts, the policy statement said.
In his opening statement of the press conference following the interest rate announcement, Governor Tiff Macklem said that while there was a consensus to hold the policy rate at 2.75 percent,"there was more diversity of views" around the path forward."On balance, 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."
Overall, the BoC signaled a continuing wait-and-see stance, keeping its ammunitions for the time being as it repeated it is proceeding carefully. The governor later said during the press conference that carefully means the central bank is"less forward looking than usual".
In its policy statement, the BoC repeated its focus on the same risks and uncertainties it cited in its April statement: the extent of the impact of U.S. tariffs on Canadian exports; the spillover into business investment, employment and household spending; the extent and pace at which cost increases are passed on to consumer prices; and inflation expectations.
Canada's GDP expanded at an annualized pace of 2.2 percent in the first quarter, above expected by markets and the central bank itself, and slightly faster than 2.1 percent the previous quarter. However, much of it came from a surge in trade activity to avoid costs related to tariffs. This wasn't a Canadian-specific trend as the BoC mentioned in its statement it was behind the resilience of the global economy. It added the composition of growth was largely as expected.
Canada's household consumption growth slowed to 1.2 percent in the first quarter from 4.9 percent in the fourth quarter of 2024, and overall final domestic demand contracted 0.1 percent after expanding 5.2 percent, failing to increase for the first time since the end of 2023, Statistics Canada reported May 30. Looking ahead, the BoC has already factored in a GDP growth that would be considerably weaker in the second quarter, with the strength in exports and inventories reversing and final domestic demand remaining subdued.
In his opening statement, Macklem said"It is still too soon to see the direct effects of retaliatory tariffs in consumer price data." He added, however, that"underlying inflation could be firmer than we thought."
On the inflation front, the 12-month CPI growth came down to 1.7 percent in April from 2.3 percent in March. Core measures, however, reflected upward pressure with both CPI-trim and CPI-median breaking above 3 percent, the upper end of the central bank's operational band. The BoC pointed out that inflation excluding taxes rose 2.3 percent, slightly more than it had anticipated. It also stressed that recent surveys indicate households expect higher prices as a result of tariffs, which businesses say they intend to pass on.
We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs, the BoC statement repeated.
The central bank last lowered its overnight target rate to 2.75 percent at its March 12 meeting after continuously cutting rates since June 2024, when they came down to 4.75 percent from 5 percent.
At 2.75 percent, the policy rate remains within the nominal neutral range of 2.25 to 3.25 percent, the same as the U.S.
In its forecasting, the BoC moved to a scenario approach in its April Monetary Policy Report: the first scenerio assumes that most tariffs are negotiated away although trade uncertainty continues until 2026, leading to a temporary wakening of Canadian and global growth, with inflation falling to 1.5 percent for one year before returning to the 2 percent target.
Under the sharp global growth slowdown of the second scenario, Canada would enter a recession while inflation would top 3 percent in mid-2026 before returning to 2 percent. In both cases, the neutral rate remains in the 2.25 to 3.25 percent range.
In its latest economic survey of Canada release May 26, the OECD projected GDP domestic GDP growth to slow to 1.1 percent in 2025 from 1.5 percent in 2024, with little change at 1.1 percent in 2026. In its global economic outlook released June 3, it revised down global growth to 2.9 percent in both 2025 and 2026 from 3.1 percent and 3.0 percent, respectively.
With uncertainty about U.S. tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, Governing Council decided to hold the policy rate as we gain more information on U.S. trade policy and its impacts, the policy statement said.
In his opening statement of the press conference following the interest rate announcement, Governor Tiff Macklem said that while there was a consensus to hold the policy rate at 2.75 percent,"there was more diversity of views" around the path forward."On balance, 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."
Overall, the BoC signaled a continuing wait-and-see stance, keeping its ammunitions for the time being as it repeated it is proceeding carefully. The governor later said during the press conference that carefully means the central bank is"less forward looking than usual".
In its policy statement, the BoC repeated its focus on the same risks and uncertainties it cited in its April statement: the extent of the impact of U.S. tariffs on Canadian exports; the spillover into business investment, employment and household spending; the extent and pace at which cost increases are passed on to consumer prices; and inflation expectations.
Canada's GDP expanded at an annualized pace of 2.2 percent in the first quarter, above expected by markets and the central bank itself, and slightly faster than 2.1 percent the previous quarter. However, much of it came from a surge in trade activity to avoid costs related to tariffs. This wasn't a Canadian-specific trend as the BoC mentioned in its statement it was behind the resilience of the global economy. It added the composition of growth was largely as expected.
Canada's household consumption growth slowed to 1.2 percent in the first quarter from 4.9 percent in the fourth quarter of 2024, and overall final domestic demand contracted 0.1 percent after expanding 5.2 percent, failing to increase for the first time since the end of 2023, Statistics Canada reported May 30. Looking ahead, the BoC has already factored in a GDP growth that would be considerably weaker in the second quarter, with the strength in exports and inventories reversing and final domestic demand remaining subdued.
In his opening statement, Macklem said"It is still too soon to see the direct effects of retaliatory tariffs in consumer price data." He added, however, that"underlying inflation could be firmer than we thought."
On the inflation front, the 12-month CPI growth came down to 1.7 percent in April from 2.3 percent in March. Core measures, however, reflected upward pressure with both CPI-trim and CPI-median breaking above 3 percent, the upper end of the central bank's operational band. The BoC pointed out that inflation excluding taxes rose 2.3 percent, slightly more than it had anticipated. It also stressed that recent surveys indicate households expect higher prices as a result of tariffs, which businesses say they intend to pass on.
We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs, the BoC statement repeated.
The central bank last lowered its overnight target rate to 2.75 percent at its March 12 meeting after continuously cutting rates since June 2024, when they came down to 4.75 percent from 5 percent.
At 2.75 percent, the policy rate remains within the nominal neutral range of 2.25 to 3.25 percent, the same as the U.S.
In its forecasting, the BoC moved to a scenario approach in its April Monetary Policy Report: the first scenerio assumes that most tariffs are negotiated away although trade uncertainty continues until 2026, leading to a temporary wakening of Canadian and global growth, with inflation falling to 1.5 percent for one year before returning to the 2 percent target.
Under the sharp global growth slowdown of the second scenario, Canada would enter a recession while inflation would top 3 percent in mid-2026 before returning to 2 percent. In both cases, the neutral rate remains in the 2.25 to 3.25 percent range.
In its latest economic survey of Canada release May 26, the OECD projected GDP domestic GDP growth to slow to 1.1 percent in 2025 from 1.5 percent in 2024, with little change at 1.1 percent in 2026. In its global economic outlook released June 3, it revised down global growth to 2.9 percent in both 2025 and 2026 from 3.1 percent and 3.0 percent, respectively.
Market Consensus Before Announcement
The consensus sees no rate cut this time after better than expected GDP figures for the first quarter. Some forecasters still look for a 25 bp cut but it’s a minority view.
Definition
Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.
Description
Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
