Uncertainty Persists Over Canada’s Interest Rate Path

The Bank of Canada has chosen to hold its policy rate at 2.75 per cent for the third consecutive time, reflecting uncertainty around global trade tensions and their impact on the Canadian economy.

Meeting notes show policymakers were divided. Some argued against further rate cuts, citing the economy’s resilience and concern that additional easing could fuel inflation. They noted that businesses and consumers were adapting, and sectors less reliant on U.S. trade were supporting growth, even if overall activity was slower. With monetary policy effects taking time to unfold, additional cuts risked stimulating demand just as it was already recovering, creating added price pressures.

Others, however, supported more easing. They pointed to lingering slack in the economy and the possibility of further weakness in the labour market. According to meeting discussions, if inflation risks failed to materialize, there could be room for additional stimulus to reduce slack and support the adjustment to shifting trade patterns.

Recent data painted a mixed picture. First-quarter GDP grew 2.2 per cent, boosted by businesses stockpiling ahead of tariffs. The central bank still expects weakness in the second quarter, though early estimates suggest the economy may avoid contraction. Unemployment has held at 6.9 per cent, with layoffs contained but little net job growth so far this year.

Inflation remains a key concern. Core measures have hovered near three per cent since spring, but the long-term impact of tariffs is uncertain. Policymakers agreed that inflation expectations remain stable, though tariff-related price pressures are only beginning to surface.

Instead of publishing a single forecast, the bank outlined three possible scenarios:

• Baseline: A brief contraction in the second quarter followed by growth of about 1 per cent in the third, with activity strengthening into 2026 and 2027.

• De-escalation: Faster growth of around 2 per cent in late 2025, averaging 1.7 per cent through 2027, with inflation staying below target until 2026.

• Escalation: Continued contraction through the rest of 2025, followed by a slow recovery, with inflation rising above 2.5 per cent in 2026.

  
  

Given these uncertainties, policymakers concluded they need more clarity before committing to further moves. For now, the door remains open to additional rate relief if economic weakness outweighs inflation risks.