In its latest summary of deliberations, the Bank revealed that while Governing Council debated a 25-basis-point cut, it ultimately agreed to hold the policy rate at 2.75%. The deciding factor: inflation hadn’t cooled as much as hoped, and the economy still appeared more resilient than not.
Policymakers were particularly concerned by recent inflation readings, which showed “measures of underlying inflation had come in higher than they expected since the beginning of the year.”
Even with headline CPI down to 1.7% in April, due in part to the removal of the federal carbon tax, core inflation remained sticky.
Excluding the tax change, inflation stood at 2.3%, and the Bank’s preferred core measures were running “above 3%.” Members pointed to cost pressures tied to tariffs and supply chain changes as possible contributors, with “some members express[ing] concern about the increase in the breadth of CPI components growing above 3% in recent months, particularly for services.”
The Bank also noted that “businesses have been reporting that they would pass on higher costs stemming from trade disruptions to prices and could use tariffs as a justification for doing so.”
Slower growth, but no sharp downturn
While there were clear signs of a slowdown, the data didn’t yet point to a sharp downturn. First-quarter growth came in slightly stronger than expected, buoyed by exports and business investment—though the latter was likely front-loaded to beat tariff-related cost hikes.
“Final domestic demand was flat in the first quarter,” the Bank noted, “yet overall GDP growth held up thanks to the pull-forward of exports and some resilience in consumption and business investment.”
That said, Governing Council members expressed concern about soft spots in the economy that are emerging. This includes weakening labour market conditions, particularly in trade-exposed sectors, and the unemployment rate rising to 6.9%. Residential investment also fell, with housing activity subdued in Toronto and Vancouver.
Uncertainty remains the biggest threat
Throughout the deliberations, uncertainty surrounding U.S. trade policy figured prominently. While the tone of global trade tensions had improved since April, the Bank emphasized that “the primary source of uncertainty—and the biggest threat facing the Canadian economy—was the trade conflict initiated by the United States.”
In fact, during the policy meetings, President Trump announced that tariffs on Canadian steel and aluminum would double to 50%, highlighting the risk of renewed shocks. Policymakers said they were monitoring how higher tariffs might filter through to exports, investment, hiring, and prices.
“Members agreed that these dynamics were complex and could evolve in several ways,” the summary stated. “They would need to proceed carefully as they gain more information.”
Why the Bank chose to wait
In weighing a rate cut, members considered three key developments: inflation was hotter than forecast, economic data showed some resilience, and uncertainty was still running high. While the Bank acknowledged that it may need to cut again, it saw little urgency this time.
“Principally reflecting these considerations, Governing Council decided to maintain the policy interest rate at 2.75%,” the Bank wrote, “as they continued to gain more information about U.S. trade policy and its impacts on the Canadian economy.”
There was some divergence among members on what comes next. The summary noted that “the weaker the economy and the more downward pressure on inflation, the more there would be a need to lower the policy interest rate further.”
But if underlying inflation proves sticky, “it would be more difficult to cut the policy rate.” For now, Governing Council agrees that further cuts may still be needed if trade disruptions deepen and inflation pressures begin to ease.
Featured image by David Kawai/Bloomberg via Getty Images
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Last modified: June 17, 2025