With the Bank of Canada (BoC) set to announce its latest interest rate decision on Wednesday, economists widely anticipate a hold at 2.75%. The central bank’s rate, which has been trimmed from a peak of 5% over the past year, is now at a crossroads as conflicting economic signals emerge.
Economy Sending Mixed Signals
Canada’s economy expanded at an annualized pace of 2.2% in the first quarter of 2025, beating expectations of 1.7%. The better-than-expected figure was buoyed by a surge in exports—mainly due to U.S. firms stockpiling ahead of looming tariffs. However, beneath the headline growth, household spending and housing investment remain subdued, highlighting fragile domestic demand.
Meanwhile, April’s inflation report showed core inflation averaging 3.15%—well above the BoC’s 2% target. This uptick marked the fastest pace in nearly a year, complicating the BoC’s policy calculus.
The labor market is also flashing cautionary signs. Unemployment ticked up to 6.9% in April, its highest level since late 2023, as hiring slowed across several sectors.
What the Experts Are Saying
Economists from Canada’s major banks are mostly aligned in forecasting a pause this week—but differ on what comes next.
- TD Bank’s Rishi Sondhi expects the BoC to hold steady for now, but sees two more cuts before year-end, which could lower the rate to 2.25%.
- RBC’s Nathan Janzen and Abbey Xu cite robust Q1 GDP and sticky inflation as reasons for a cautious stance. They see the BoC waiting for further clarity before acting.
- Scotiabank’s Derek Holt is more hawkish, warning that premature cuts could risk BoC credibility. He advocates staying put for now.
- CIBC’s Avery Shenfeld notes weak domestic indicators justify cuts, but admits the central bank may wait until later in the year.
- BMO’s Doug Porter foresees further easing, forecasting a 2.00% rate by early 2026 if weakness continues.
Market Expectations
Traders are pricing in a 75% probability that the BoC keeps rates unchanged this week, according to swaps market data, reflecting widespread confidence in a cautious approach. According to Bloomberg terminal data, forward-rate agreements imply at least two additional 25-basis-point rate cuts by December 2025, particularly if external trade disruptions or domestic weaknesses intensify.
A key concern for policymakers is the persistence of underlying inflation. While headline CPI eased to 2.7% in April—down from 3.1% in February—core inflation, which strips out volatile items like food and energy, remains sticky at 3.15%. This has led to concerns that inflation expectations could become entrenched. Simultaneously, the labor market has begun to soften: job creation slowed markedly in April and wage growth has decelerated from 5.1% to 4.4% year-over-year, adding pressure on consumer spending and overall demand.
Balancing these conflicting forces, the BoC faces a delicate policy dilemma: act too soon and risk undermining its inflation-fighting credibility, or wait too long and jeopardize a fragile recovery.
External Pressures Mount
The Bank’s decision will also be shaped by external forces. In March 2025, the United States imposed 25% tariffs on Canadian steel and aluminum imports under Section 232 of the Trade Expansion Act, citing national security concerns. These tariffs, which include derivative products, have significantly impacted Canadian exporters. In retaliation, Canada announced 25% tariffs on $29.8 billion worth of U.S. goods, including orange juice, peanut butter, wine, spirits, beer, coffee, and household appliances. This tit-for-tat trade dispute has disrupted supply chains and raised inflationary pressures across both countries. Given that approximately 76% of Canada’s exports are destined for the U.S., these developments introduce material headwinds that could slow future growth and further complicate the BoC’s monetary policy decisions.
Looking Ahead
The BoC’s policy statement—scheduled for release on June 4 at 9:45 AM ET—will be closely parsed for any shifts in tone or forward guidance. For now, the central bank appears set to wait and watch.
As global central banks reassess their easing cycles, the BoC’s next moves will serve as a bellwether for how inflation, growth, and policy interact in a post-pandemic, geopolitically tense world.
Marc has been involved in the Stock Market Media Industry for the last +5 years. After obtaining a college degree in engineering in France, he moved to Canada, where he created Money,eh?, a personal finance website.
