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On Wednesday, June 4th, at its regular policy meeting, the Bank of Canada (BoC) held its target for the overnight rate at 2.75 per cent. This is the second pause in rate policy after seven consecutive rate drops. With most banks and mortgage lenders, this will mean consumer prime rates will continue at 4.95 per cent (5.10 per cent with TD Canada Trust).

Why did the Bank of Canada hold the policy rate?

In a single word: uncertainty. Since the last BoC rate meeting in April, the US government has implemented tariffs, escalated tariffs, paused tariffs, and threatened new tariffs against many countries around the world. It is now also in bilateral trade negotiations with many countries, which are seeking to reduce or avoid long-term tariffs on their exports heading to the US. However, the outcomes of these trade negotiations, most of which are being conducted at breakneck speed with the threat of tariffs hanging overhead, are incredibly hard to predict and plan around, so for now the BoC economists are essentially throwing up their hands and saying “we’ll just have to wait and see what happens.”

In the background, a few other “non-tariff” factors are also playing into the decision to hold. First, in Canada our Q1 GDP growth came in a bit higher than expected at 2.2 per cent, but this is likely due to a bunch of extra sales into the US as American companies rushed to bulk up their inventories before the tariffs came into effect. If this is the case, we can expect that Q2 GDP growth will drop substantially, but we won’t have those numbers until later in the summer. Our labour market has also weakened, pushing unemployment up to 6.9%. Regarding inflation, the headline CPI number dropped substantially to 1.7 per cent in April, but this was only because of the cancellation of the carbon tax on fuel. Excluding this tax effect, inflation actually stayed constant at 2.3 per cent (the same as it was in March), and in many segments of the BoC’s core inflation measurements, inflation was above 3 per cent.

What’s next for the policy rate?

At this point, the BoC is wrestling with conflicting signals from our economy and the big unknown factor of what the US is going to announce next in its trade and tariff negotiations.

Weakness in our jobs market combined with expected weakness in Q2 GDP would both normally push the BoC towards cutting the policy rate, but our inflation rate is remaining stubbornly high and the BoC can’t really cut the policy rate and risk driving inflation up. There will be 2 more inflation reports published before the next rate announcement (May and June data), and so these will play a big role in guiding the next step. If the May and June inflation data shows inflation coming back down towards the 2 per cent target the BoC will be much more likely to give us another quarter point rate drop.

Of course, there will also be the Canada-US trade negotiations and tariff war to consider. If there are positive signs of progress and de-escalation, that would also push the BoC towards a rate drop. But if the chaos and uncertainty continues, the BoC might stick to a holding pattern as it waits for more data to emerge.

The next scheduled BoC rate announcement is July 30th, 2025.

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