The Bank of Canada maintained interest rates as expected, and there may be a future rate cut, requiring further observation of the impact of Trump's tariffs

On Wednesday, the Bank of Canada maintained its interest rate at 2.75% for the second consecutive time, in line with market expectations. However, the central bank also emphasized that if the economy continues to weaken and inflation remains moderate, the possibility of initiating interest rate cuts cannot be ruled out.

Bank of Canada Governor Macklem stated that, against the backdrop of global turmoil, the central bank's key task remains to maintain domestic price stability. Currently, the central bank "is not as forward-looking as before," but there is a clear consensus within the monetary policy committee that at this stage, actions should be paused to await more information and see how the U.S.-Canada trade conflict evolves.

However, Macklem also pointed out that there are still differences within the committee regarding the future path of interest rates, and not all members are in agreement.

After the announcement, the U.S. dollar fell 0.4% against the Canadian dollar, hitting a new low of 1.3662 since 2025. Canadian government bond prices rose, with yields following U.S. Treasury yields lower, where the 2-year government bond yield fell 3 basis points to 2.59%.

In addition, before the announcement, the market originally expected about 42 basis points of rate cut space from the Bank of Canada within the year, but after the statement was released, that expectation dropped to about 37 basis points.

Escalation of Trade War is the Current Biggest Source of Uncertainty

The Bank of Canada pointed out that the reason the central bank chose to stand still is to wait for more information regarding the future direction of U.S. policies.

U.S. foreign trade policy is the biggest headwind facing the Canadian economy; this is impacting Canadian exports while also increasing uncertainty for consumers and businesses. The outcome of trade negotiations is highly uncertain, and the increase in steel tariffs further highlights this unpredictability.

In the context of increasing global uncertainty, the central bank has chosen to act cautiously and closely monitor the potential chain reactions triggered by tariffs, including:

To what extent will U.S. tariffs impact Canadian exports;

Whether this impact will further affect business investment, employment, and consumer spending;

Whether businesses will pass on higher tariff costs to consumers, thereby pushing up inflation;

Whether market and public expectations for future inflation will change as a result.

In addition to external risks, the domestic inflation trend in Canada also makes the central bank hesitant to act rashly. Although the economy performed better than expected in the first quarter, Bank of Canada Governor Macklem pointed out that this growth may be "borrowing strength from the future," and should not be overly optimistic.

More critically, inflation data has shown an unexpectedly upward trend, with Canada's core inflation rate soaring to 3.2% in April, reaching a new high in over a year. Macklem stated that current underlying inflation pressures may be more severe than previously thought.

Therefore, the Bank of Canada wrote in its statement:

"In the context of high uncertainty regarding U.S. tariffs, a soft but not significantly weakening Canadian economy, and some unexpectedly strong inflation, the management committee has decided to maintain the interest rate unchanged for now, awaiting more signals regarding the impact of U.S. trade policies." The chief economist of the Alberta Central Credit Union, Charles St-Arnaud, also pointed out that the Bank of Canada is currently clearly more focused on inflation rather than economic downturns. The experience of soaring inflation over the past two years, especially in 2022, may have left them with some psychological shadows.

In addition, the Bank of Canada stated that future policies will continue to assess the balance of two pressures:

One is the downward pressure on inflation caused by economic weakness;

The second is the upward pressure on inflation caused by rising costs such as tariffs.

The Bank of Canada Reveals Limited Forward Guidance

In April this year, the Bank of Canada chose to pause interest rate cuts for the first time in this round of monetary easing and made an important adjustment by no longer releasing specific numerical forecasts for GDP and inflation, marking the first change since the COVID-19 pandemic. Instead, the central bank proposed two "possible scenarios" to describe the future economic direction.

However, in the latest statement released this Wednesday, the central bank did not mention these two scenarios again.

In this regard, Governor Macklem explained at a press conference that the current state of the Canadian economy is in the middle ground between these two scenarios, and the previously envisioned worst-case scenario—namely the possibility of Canada falling into a prolonged severe recession—has diminished.

Deputy Governor Carolyn Rogers also added that if overall uncertainty eases in the future, the central bank hopes to restore specific economic forecast numbers in the July monetary policy report.

How Does the Market View It?

Analysts pointed out that the Bank of Canada's current attitude is to adopt a wait-and-see approach in the face of unclear U.S.-Canada trade disputes, deciding on the next steps only when clearer signals emerge.

According to a Bloomberg survey of economists, most economists and investment institutions believe that the Canadian economy will continue to weaken for the remainder of this year, especially with risks of consecutive contractions in GDP in the second and third quarters. However, inflation is expected to stabilize around 2%, which is the central bank's target level.

Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce (CIBC), stated that if the unemployment rate continues to rise as expected and inflation for non-tariff-related goods declines, a 25 basis point rate cut in July will be very likely.

However, Karl Schamotta, a strategist at Corpay, cautioned that there are still many key data points to be released between now and July 30, including two retail sales data, two employment reports, two inflation data, one consumer and business confidence survey, and a series of tariff expirations and negotiation milestones.

He stated that if the economy is more resilient than expected and inflation pressures are still increasing by then, the rate cut may be delayed.

Stuart Paul, a Canadian economist at Bloomberg Economics, believes:

The overall tone of the Bank of Canada's statement is dovish, and Governor Macklem's remarks also suggest that the possibility of another rate cut this year is relatively high