Bank of Canada expected to hold rates steady Wednesday as economy outperforms

Canada’s GDP grew at an annualized rate of 2.2% in the first quarter of the year, matching the last quarter of 2024 and defying expectations of a tariff-driven economic stall.

According to Statistics Canada, the increase was driven by a rise in both imports and exports, especially of tariff-affected products, like cars, oil and gas, industrial machinery, equipment and parts.

That, however, has some economists worried that the strong headline was driven by a pre-tariff buying spree as customers rushed orders ahead of an anticipated price hike, and might be hiding some more worrying economic trends. For example, manufacturing, utilities, residential construction, household spending and household savings were all trending downward.

Defying rate expectations

Prior to the latest GDP reporting, almost all of Canada’s major financial institutions were betting on a June rate cut. Now, many have had to walk back those forecasts.

In fact, as of about a month ago, BMO, CIBC, National Bank and RBC were forecasting a 25 bps cut in June, with TD going a step further, suggesting we could see another 50 bps reduction. TD has since revised that outlook.

Among the country’s major financial institutions, only Scotiabank had predicted no change to rates—a view the others now appear to share, at least for this week’s meeting.

Why the BoC may wait longer to cut

In a post titled “No way the Bank of Canada Should Be Cutting,” Scotia’s Derek Holt argued that underlying inflation pressures remain too persistent to justify further easing.

“There is no way that the BoC should be cutting any time soon, if at all,” Holt wrote, pointing to persistently elevated core inflation—even before the full impact of tariff-related supply shocks sets in.

He added that April’s inflation data came in hotter than the Bank’s own projections. “Despite modest slack, other forces are keeping core inflation at sticky, elevated levels,” he noted.

Now, on the heels of a better-than-expected GDP report, other major banks are now echoing Holt’s more cautious outlook.

“The key point here is that the GDP figures are sending no obvious distress signals so far in 2025,” wrote BMO Chief Economist Douglas Porter in an update following the GDP announcement. “With this sturdy set of results, we are officially abandoning our call of a rate cut next week and now look for the next rate trim eight weeks hence at the late-July decision.”

Porter suggests the strong GDP reading may reflect an overly pessimistic view of the Canadian economy, and an over-estimation of the impact tariffs would have. He suggests that, while stocks took a beating in the early part of the year, they bounced back quickly. Business and consumer sentiment also appear to be recovering after turning sour in the wake of the tariff announcements. 

If the market indeed overestimated the impacts of the trade war, and if the economy remains relatively steady while core inflation remains relatively high, the Bank of Canada may not be inclined to cut rates as aggressively or quickly as most had anticipated this year.

“All of this adds up to a less pressing need for monetary policy to support the economy,” Porter wrote. “The back-up of core inflation to above 3% will keep the Bank more cautious, suggesting that rates will be held steady at (this) week’s decision. We continue to believe that this is not the end of the line for rate cuts, but we are officially pushing back our timing of those trims, to restart in late July, and perhaps stretching into early next year.”

As of Friday, bond markets were pricing in just a 32% chance of a rate cut at the June meeting, signalling a strong consensus for a hold. Expectations for July, however, remained high, with markets assigning a 75% probability to a 25-bps cut.

BoC policy rate forecasts from the Big 6 banks

Here’s a look at where Canada’s big banks currently stand ahead of this week’s rate decision—most have now shifted toward expecting a hold, following stronger-than-expected GDP data.