Bank of Canada Holds Policy Rate at 2.75% Amid Trade & Inflation Concerns

Policy Pause Amid Trade Uncertainty

On June 4, 2025, the Bank of Canada (BoC) maintained its policy interest rate at 2.75%, signaling a cautious approach due to persistent trade disruptions and core inflation pressures This marks the second straight hold after aggressive cuts totalling 225 basis points since mid-2024.

BoC Governor Tiff Macklem noted that while headline inflation has cooled to 1.7% year-over-year, underlying price pressures—particularly from shelter and tariff-linked goods—remain stubborn. Policymakers agreed on a “data-dependent” pause to fully assess evolving global trade developments and economic indicators

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Tariff Turmoil Still Looms

The bank highlighted persistent uncertainty surrounding U.S. tariffs on Canadian exports—from steel and aluminum to automotive components. These actions have led businesses to pass on higher costs, contributing to inflation pressures As Macklem said, “tariffs remain the biggest headwind facing the Canadian economy,” prompting the central bank to proceed cautiously

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Inflation Landscape: Stabilizing, But Underlying Risks Linger

• Headline CPI: remains at a modest 1.7% (May), stable from April
• Core inflation (trim/median): stands at ~3%, just under the upper target band, indicating stickiness .
• Shelter costs: still contributing significantly, though recent growth shows some signs of easing

While monthly CPI rose slightly (about 0.6% in May), the BoC viewed inflation trends as manageable but cautious, justifying a pause .

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Economic Resilience vs Emerging Weakness

Canada’s economy showed unexpected resilience in Q1 2025, growing at 2.2% year-on-year, mainly due to stockpiling and exports pre-tariff . However, economic activity slowed thereafter. Indicators of labor market softness and housing slowdown began to emerge, though not yet severe.

BoC officials emphasized this mixed picture: strong initial activity, yet potential slowdown in Q2 requiring continued surveillance .

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Currency & Market Reactions

The Canadian dollar (loonie) strengthened slightly to around USD 1.3680 following the hold announcement, supported by robust inflation and diminished rate-cut expectations .

Bond yields also softened in response to the BoC’s decision and prevailing external uncertainty .

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What’s Next for Rates?

Markets currently assign roughly 44–55% odds of a rate cut by July 30, reflecting a tug-of-war between disinflation and trade risks . Analysts anticipate at least two more cuts before year-end, potentially lowering rates to 2.25% or 2% should economic growth slow further

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Implications for Stakeholders

• Consumers & Borrowers:
  Interest rates likely remain steady in the short term. While mortgage and lending costs may not drop immediately, we could see modest relief later in the year.
• Businesses & Exporters:
  Trade uncertainty remains the dominant variable. Firms must prepare for tariff-driven supply chain disruptions and possible cost push inflation.
• Investors:
  With lower rates still likely in the medium term, bonds and interest-rate-sensitive equities may benefit—but volatility remains due to trade-policy unpredictability.

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✅ Summary Table

Indicator	Current Status
Policy Rate	2.75%
Headline Inflation (May YoY)	1.7%
Core Inflation (CPI-trim/median)	~3%
Q1 GDP Growth	2.2%
Rate Cut Odds (July 30)	~44–55%
Expected Cuts (by end-2025)	2–3 cuts (to 2.25–2.00%)

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Final Take

The Bank of Canada’s decision to hold rates reflects a prudent balancing act between still-elevated core inflation and uncertain trade dynamics. While headline inflation is stabilizing, there’s enough unresolved risk—both from tariffs and economic growth—that the central bank is holding its ground for now. But should trade tensions ease and core inflation cool, expect gradual easing in the latter half of 2025.