Summary
- The Bank of Canada released its decision to hold the policy rate at 2.75%, in line with our expectations. The decision was correctly anticipated by the majority of Bloomberg surveyed analysts and was the favored outcome as suggested by OIS pricing.
- The decision to hold was primarily on fears of re-emerging underlying inflationary pressures.
- The CAD OIS curve suggests investors are positioned for one and a half 25bp cuts from the Bank of Canada by 2025 year-end.
- The Governing Council, while united in its decision to pause at this meeting, is not united in its forward rate path as uncertainty pertaining to both trade policy and its potential outcomes continues to muddy the waters.
- We believe the Bank is one 25bp cut away from a terminal policy rate of 2.50% and we see this cut at the next meeting on July 30.
On June 4, the Bank of Canada released its decision to hold the policy rate at 2.75%, in line with our forecasts. We believe the Bank is one 25bp cut away from a terminal policy rate of 2.50% and we see this cut at the next meeting on July 30.
Uncertain Outlook
We posited in our Bank of Canada preview that the economic environment in Canada was somewhat ambiguous. Almost every claim in the press statement for this decision was qualified in some manner by a “but” or “however,” and this is with good reason. There is far more nuance to understanding the dynamics in the Canadian economy than just looking at the headline data, even before accounting for uncertainty and potential risks.
While GDP was stronger than expected, it was heavily supported by US firms frontloading Canadian exports. Domestic demand on the other hand, while not weak, has softened. Consumer spending has slowed as well, but is still growing. “Spending by Canadian families and business has shown some resilience in the face of US tariffs and heightened uncertainty. But they are likely to remain cautious, suggesting domestic spending will remain subdued.” Headline CPI inflation is still relatively close to target, but rising prices as firms restructure their supply chains may suggest new pressures in goods inflation.
While covered in depth in our preview, we think there is value in diving into the underlying inflationary and economic pressures once more. The CPI inflation report for April was actually deflationary, at -0.1% m/m, and filtered through to a y/y print of 1.7% y/y. The bulk of the deflationary pressures were due to the elimination of the carbon tax and its pass through to lower gasoline prices. The Bank of Canada noted that “this tax effect will remain in the year-over-year change in the CPI for the next 11 months before falling out next April,” and that “inflation excluding taxes was 2.3%.” Worse yet, both the time and median inflation metrics have printed well-above target, at 3.1% and 3.2% respectively. The statement also noted the impact of inflation
expectations, as “recent surveys continue show consumers are bracing for higher prices, and many businesses say they intend to pass on tariff costs.” As such, it is clear that the risks to inflation are heavily skewed to the upside. However, there is the additional risk of the inflationary impacts of retaliatory tariffs, and as Macklem mentioned in the press conference, the impacts of these
retaliatory tariffs have not yet passed through to the data, but the effects are likely to be inflationary as well. There will be two more inflation reports from now to the next rate decision.
Most of the economic activity outlook is directly tied not to the tariffs themselves, but rather to the surrounding uncertainty. Businesses don’t want to invest or hire when they don’t know what their costs or revenues will look like in a few months due to tariffs and retaliation, and this has directly impacted labor. The unemployment rate registered 6.9% in April, which is above pre- pandemic norms, and is expected to tick up to 7.0% in May. The Statement noted that businesses have been indicating to the Bank that they plan to “scale back hiring,” which clearly suggest further loosening down the line and slowing payrolls growth.
The majority of uncertainty plaguing Canada at the moment is attributed to US trade policy. As noted previously, around 24% of Canadian GDP is directly tied to exports to the US, and both PM Carney and Governor Macklem have supported the idea of not necessarily decoupling from the US, but further diversifying. Macklem made the statement that Canadian and US trade will always be concentrated (“I mean, look at a map!”), but the associated costs of diversifying are also a real concern for the Governing Council.
While there may have been a “clear consensus” to pause, what is less clear is forward path for
interest rates. See the passage from the Opening Statement below:
“At this decision there was a clear consensus to hold policy unchanged as we gain more information. We also discussed the path ahead for the policy interest rate. Here, there was more diversity of views. On balance, members thought there could be a need fo r a reduction in the policy rate if the economy weakened in the face of continued UIS tariffs and uncertainty, and cost pressures on inflation are contained. Faced with unusual uncertainty, Governing Council is proceeding carefully, with particular attention to the risks. This means we are being less forward-looking than usual.”
While the Bank may be less forward-looking, we are still of the view that the Bank is one 25bp cut away from a terminal rate of 2.50%, and see this cut at the next meeting on July 30. OIS pricing is slowly coming into line with our view, with investors positioned for around one and a half 25bp cuts this year, and is pricing in around 52% of a cut at the next meeting.
Please see the Bank of Canada economic outlook framework and corresponding charts below:
Scenario 1: Most tariffs imposed since the trade conflict began are negotiated away, but the process is unpredictable. Uncertainty about trade policy continues until the end of 2026.
Scenario 2: The uncertainty and limited tariffs in Scenario 1 persist, and other US tariffs are added. A long-lasting trade war unfolds.
We, and the Bank of Canada, expect the trade situation to play out somewhere between scenario 1 and scenario 2. While deals are being negotiated both globally and between the US and Canada specifically, the final outcomes of these negotiations are uncertain.
The Bank sees the main risks to its economic outlook from the April Monetary Policy Statement are as follows:
To the upside:
- Tariffs and supply chain disruptions could have a greater impact
- Tariffs could raise longer-term inflation expectations To the downside:
- Tariffs could weaken the economy more than expected
- Financial stress could worsen
Table 3: Bank of Canada Economic Projections as of April 2025
Bank of Canada Statements
June 4, 2025
The Bank of Canada today maintained its target for the overnight rate at 2.75%, with the Bank Rate at 3% and the deposit rate at 2.70%.
Since the April Monetary Policy Report, the US administration has continued to increase and decrease various tariffs. China and the United States have stepped back from extremely high tariffs and bilateral trade negotiations have begun with a number of countries.
However, the outcomes of these negotiations are highly uncertain, tariff rates are well above their levels at the beginning of 2025, and new trade actions are still being threatened.
Uncertainty remains high.
While the global economy has shown resilience in recent months, this partly reflects a temporary surge in activity to get ahead of tariffs. In the United States, domestic demand remained relatively strong but higher imports pulled down first-quarter GDP. US inflation has ticked down but remains above 2%, with the price effects of tariffs still to come. In Europe, economic growth has been supported by exports, while defence spending is set to increase. China’s economy has slowed as the effects of past fiscal support fade. More recently, high tariffs have begun to curtail Chinese exports to the US. Since the financial market turmoil in April, risk assets have largely recovered and volatility has diminished, although markets remain sensitive to US policy announcements. Oil prices have fluctuated but remain close to their levels at the time of the April MPR.
In Canada, economic growth in the first quarter came in at 2.2%, slightly stronger than the Bank had forecast, while the composition of GDP growth was largely as expected. The pull-forward of exports to the United States and inventory accumulation boosted activity, with final domestic demand roughly flat. Strong spending on machinery and equipment held up growth in business investment by more than expected. Consumption slowed from its very strong fourth-quarter pace, but continued to grow despite a large drop in consumer confidence. Housing activity was down, driven by a sharp contraction in resales.
Government spending also declined. The labour market has weakened, particularly in trade- intensive sectors, and unemployment has risen to 6.9%. The economy is expected to be considerably weaker in the second quarter, with the strength in exports and inventories reversing and final domestic demand remaining subdued.
CPI inflation eased to 1.7% in April, as the elimination of the federal consumer carbon tax reduced inflation by 0.6 percentage points. Excluding taxes, inflation rose 2.3% in April, slightly stronger than the Bank had expected. The Bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up. Recent surveys indicate that households continue to expect that tariffs will raise prices and many businesses say they intend to pass on the costs of higher tariffs. The Bank will be watching all these indicators closely to gauge how inflationary pressures are evolving.
With uncertainty about US 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 US trade policy and its impacts. 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.
Governing Council is proceeding carefully, with particular attention to the risks and uncertainties facing the Canadian economy. These include: the extent to which higher US tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve.
We are focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. We will support economic growth while ensuring inflation remains well controlled.
April 16, 2025
The Bank of Canada today maintained its target for the overnight rate at 2.75%, with the Bank Rate at 3% and the deposit rate at 2.70%.
The major shift in direction of US trade policy and the unpredictability of tariffs have increased uncertainty, diminished prospects for economic growth, and raised inflation expectations.
Pervasive uncertainty makes it unusually challenging to project GDP growth and inflation in Canada and globally. Instead, the April Monetary Policy Report (MPR) presents two scenarios that explore different paths for US trade policy. In the first scenario, uncertainty is high but tariffs are limited in scope. Canadian growth weakens temporarily and inflation remains around the 2% target. In the second scenario, a protracted trade war causes Canada’s economy to fall into recession this year and inflation rises temporarily above 3% next year. Many other trade policy scenarios are possible. There is also an unusual degree of uncertainty about the economic outcomes within any scenario, since the magnitude and speed of the shift in US trade policy are unprecedented.
Global economic growth was solid in late 2024 and inflation has been easing towards central bank targets. However, tariffs and uncertainty have weakened the outlook. In the United States, the economy is showing signs of slowing amid rising policy uncertainty and rapidly deteriorating sentiment, while inflation expectations have risen. In the euro area, growth has been modest in early 2025, with continued weakness in the manufacturing sector. China’s economy was strong at the end of 2024 but more recent data shows it slowing modestly.
Financial markets have been roiled by serial tariff announcements, postponements and continued threats of escalation. This extreme market volatility is adding to uncertainty. Oil prices have declined substantially since January, mainly reflecting weaker prospects for global growth. Canada’s exchange rate has recently appreciated as a result of broad US dollar weakness.
In Canada, the economy is slowing as tariff announcements and uncertainty pull down consumer and business confidence. Consumption, residential investment and business spending all look to have weakened in the first quarter. Trade tensions are also disrupting recovery in the labour market. Employment declined in March and businesses are reporting plans to slow their hiring. Wage growth continues to show signs of moderation.
Inflation was 2.3% in March, lower than in February but still higher than 1.8% at the time of the January MPR. The higher inflation in the last couple of months reflects some rebound in goods price inflation and the end of the temporary suspension of the GST/HST. Starting in April, CPI inflation will be pulled down for one year by the removal of the consumer carbon tax. Lower global oil prices will also dampen inflation in the near term. However, we expect tariffs and supply chain disruptions to push up some prices. How much upward pressure this puts on inflation will depend on the evolution of tariffs and how quickly businesses pass on higher costs to consumers. Short-term inflation expectations have moved up, as businesses and consumers anticipate higher costs from trade conflict and supply disruptions.
Longer term inflation expectations are little changed.
Governing Council 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. Our focus will be on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. This means we will support economic growth while ensuring that inflation remains well controlled.
Governing Council will proceed carefully, with particular attention to the risks and uncertainties facing the Canadian economy. These include: the extent to which higher tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve.
Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war. What it can and must do is maintain price stability for Canadians.
Authors
Christian Lawrence
Head of Cross-asset
Strategy
+1 212 808 6923
Molly Schwartz
Cross-asset Macro Strategist
+1 516 640 7372
Global Economics and Markets
Global Head
Jan Lambregts
+44 20 7664 9669
Jan.Lambregts@Rabobank.com
Macro Strategy
Global
Michael Every
Senior Macro Strategist
Michael.Every@Rabobank.com
Europe
Elwin de Groot Head Macro Strategy Eurozone, ECB
+31 30 712 1322
Elwin.de.Groot@Rabobank.com
Bas van Geffen Senior Macro Strategist ECB, Eurozone
+31 30 712 1046
Bas.van.Geffen@Rabobank.com
Stefan Koopman
Senior Macro Strategist UK, Eurozone
+31 30 712 1328
Stefan.Koopman@Rabobank.com
Maartje Wijffelaars
Senior Economist Italy, Spain, Eurozone
+31 88 721 8329
Maartje.Wijffelaars@Rabobank.nl
Americas
Philip Marey
Senior Macro Strategist
United States, Fed
+31 30 712 1437
Philip.Marey@Rabobank.com
Christian Lawrence
Head of Cross-Asset Strategy
Canada, Mexico
+1 212 808 6923
Christian.Lawrence@Rabobank.com
Mauricio Une
Senior Macro Strategist
Brazil, Chile, Peru
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Mauricio.Une@Rabobank.com
Renan Alves
Macro Strategist Brazil
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Renan.Alves@Rabobank.com
Molly Schwartz
Cross-Asset Strategist
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Molly.Schwartz@Rabobank.com
Asia, Australia & New Zealand
Teeuwe Mevissen
Senior Macro Strategist China
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Teeuwe.Mevissen@Rabobank.com
Benjamin Picton
Senior Macro Strategist Australia, New Zealand
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Benjamin.Picton@Rabobank.com
FX Strategy
Jane Foley
Head FX Strategy G10 FX
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Jane.Foley@Rabobank.com
Rates Strategy
Richard McGuire
Head Rates Strategy
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Richard.McGuire@Rabobank.com
Lyn Graham-Taylor
Senior Rates Strategist
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Lyn.Graham-Taylor@Rabobank.com
Credit Strategy & Regulation
Matt Cairns
Head Credit Strategy & Regulation
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Bas van Zanden
Senior Analyst Pension funds, Regulation
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Cas Bonsema
Senior Analyst Financials
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Maartje Schriever
Analyst ABS
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Agri Commodity Markets
Carlos Mera
Head of ACMR
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Carlos.Mera@Rabobank.com
Charles Hart
Senior Commodity Analyst
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Charles.Hart@Rabobank.com
Oran van Dort
Commodity Analyst
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Andrick Payen
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Florence Schmit
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