Bank of Canada Holds Interest Rate Steady Amid Economic Uncertainty
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The Bank of Canada has decided to maintain its key interest rate at 2.75%, citing economic uncertainties stemming from the ongoing U.S. trade war. This decision marks the second consecutive meeting where the central bank has opted to keep rates unchanged, following a series of rate cuts initiated in mid-2024. Governor Tiff Macklem emphasized the unpredictability of U.S. trade actions, particularly the imposition of higher tariffs on Canadian steel and aluminum, as the primary risk to Canada's economic outlook.
Despite a stronger-than-expected 2.2% annualized growth in Q1 2025, driven by increased exports and preemptive inventory purchases, the Bank of Canada anticipates weaker growth in Q2. Core inflation, excluding volatile food and energy prices, accelerated to 3.15% in April, its fastest pace in nearly a year, potentially exacerbated by supply-chain disruptions and tariff adjustments. Although some economists argued for a rate cut due to a weakening labor market and slowing domestic demand, the central bank prioritized containment of inflation pressures.
The Canadian dollar rose to its highest level since October 2024, reaching 1.3680 per U.S. dollar, amid the Bank of Canada's decision to maintain its benchmark interest rate. Market expectations suggest a 45% chance of rate cuts resuming in July. Canada's services sector showed tentative recovery in May, with S&P Global's PMI rising to 45.6, the highest since February. Weak U.S. private payroll data and falling oil prices, due to increased OPEC+ output, also influenced currency and bond markets.
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