{"id":2666,"date":"2025-06-04T04:00:00","date_gmt":"2025-06-04T04:00:00","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/2025\/06\/04\/bank-of-canada-policy-update\/"},"modified":"2026-03-31T18:42:41","modified_gmt":"2026-03-31T18:42:41","slug":"bank-of-canada-policy-update","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/canadian-analysis\/data-flashes\/bank-of-canada-policy-update\/","title":{"rendered":"Bank of Canada policy update"},"content":{"rendered":"\n
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Another pause from the BoC<\/h2>\n\n\n\n

By Claire Fan<\/em><\/p>\n\n\n\n

Amidst a “softer but not sharply weaker<\/em>” Canadian economy and “firmness in recent inflation data<\/em>“, the Bank of Canada chose to hold rates steady again in today’s meeting.<\/p>\n\n\n\n

The decision follows a first pause back in April, and seven consecutive cuts before that. The overnight rate today at 2.75% is still in the middle of the BoC’s estimate for a neutral range of interest rates at 2.25% – 3.25%.<\/p>\n\n\n\n

Going forward, we think the path of the BoC will be largely determined by the extent of further softening in the economy. Both we and the central bank are expecting GDP growth will slow sharply in Q2 while the unemployment rate continues to edge higher. Recall in the April review we noted two key questions the BoC will ask to help guide their future policy decisions. Today we return to them for a guidepost on more details in our central bank outlook.

1. How much of an economic impact of the ongoing trade war is shown in the hard data?<\/em><\/strong>

Hard data since the last BoC meeting in April has been mixed \u2013 Q1 GDP was stronger than the BoC expected in part thanks to tariff front-running which in itself should imply weaker activities in Q2. The unemployment rate has risen as hiring scales back broadly while manufacturing sees significant job losses.

In the BoC’s more optimistic scenario 1 in their April Monetary Policy Report<\/a>, GDP growth is expected to flatline in Q2. That scenario however assumes a ~1% average tariff rate on Canadian exports to the U.S., compared to around 4.5% that we’re tracking today, after the recent changes to U.S. steel and aluminum tariffs.

That, however, still leaves Canada at the bottom of the ranking when it comes to the tariff rates that are attached to each U.S. trade partner. Early in Q2, housing weakness is persisting<\/a> but there are signs that the bleed in domestic consumption and labour market conditions could be contained.

Our own tracking of RBC card data<\/a> pointed to a solid increase in April spending. Job postings, even in the most trade-exposed sectors including manufacturing and transportation, looked to have bounced back, according to early data from Indeed.com.

Better than feared economic data in Q2 could raise the odds of a closer terminal rate than the one we’re expecting.

2. Is higher inflation persisting beyond what’s warranted by a one-time, tariff-driven adjustment to prices?<\/em><\/strong>

It’s still too early to tell. The upside surprise in April’s Canadian core CPI data was mostly thanks to categories that are not necessarily exposed to tariffs (domestic services). Still, a flare-up at the onset of tariffs sets a bad starting point for inflation trends later this year.

In the press conference, Governor Macklem also noted difficulties in deciphering the tariff impact in the official CPI data, and highlighted reliance on soft data and intel from businesses that already suggested cost increases. 

Overall, generally targeted counter-tariff measures and other reasons outlined here<\/a> underpin our expectation of noticeable but moderate impact to Canadian inflation from tariffs this year. We think it’ll roughly offset the impact of the end of consumer carbon tax to leave headline CPI tracking just above the target 2% rate over the second half of 2025.

So far, longer-term inflation expectations \u2013 a key element that could determine if inflation persists beyond what’s justified by tariffs \u2013 also appear well anchored. Later this year, faster rising\/more heightened than expected price pressures could also raise odds of fewer rate cuts from the BoC.<\/p>\n\n\n\n

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See previous versions:<\/em><\/p>\n\n\n\n

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