On Wednesday (June 4) local time, the Bank of Canada announced that it would maintain its key benchmark interest rate unchanged at 2.75%, stating that it was necessary to investigate the impact of US trade policies, but indicating that if the economy weakened due to tariffs, another interest rate cut might be necessary.
This decision marked the second consecutive wait-and-see approach by the Bank of Canada, following a significant interest rate cut cycle over the previous nine months that had reduced rates by 225 basis points.
At a press conference, Bank of Canada Governor Macklem said, “The trade war initiated by the US remains the biggest headwind facing the Canadian economy. It has hit exports and increased uncertainty for consumers and businesses.” He described US trade policies as highly unpredictable. “While we await more information, there is a clear consensus to maintain the current policy,” he said.
The day before, US President Trump insisted on the plan proposed last week to double tariffs on imported steel and aluminum from 25% to 50%. Economists expressed concern over Trump’s latest tariff move.
The Bank of Canada stated that it would continue to monitor how tariffs would impact Canadian exports, as well as their effects on business investment, employment, and household spending. Officials are also keeping an eye on inflation expectations and how higher tariff costs are being passed on.
The Bank of Canada indicated that it was weighing the upward pressure on inflation from rising prices against the downward pressure on economic growth. While the Canadian economy has slowed down, it has not weakened significantly, noting that underlying inflation might be higher than the central bank’s expectations.
Macklem claimed, “Overall, members believe that if the economy weakens in the face of persistent US tariff hikes and uncertainty, while inflationary pressures remain contained, a reduction in the policy interest rate might be necessary.”
Taken together, the Bank of Canada is willing to wait for clearer signals on how the trade conflict will unfold. Meanwhile, policymakers are actively discussing the possibility of further interest rate cuts if the economy deteriorates and inflation remains under control.
Avery Shenfeld, Chief Economist at CIBC, commented, “If unemployment continues to rise as we expect and inflation eases, there is a strong likelihood that the Bank of Canada will cut interest rates by 25 basis points in July.”
Due to falling energy prices, Canada’s inflation rate dropped to 1.7% in April, but core inflation indicators remained above the central bank’s target range of 1% to 3%. Recent surveys show that consumers are preparing for higher prices, with many businesses indicating that they intend to pass on tariff costs.
McCallum emphasized that the ongoing uncertainty surrounding the impact of US tariffs, the outcomes of trade negotiations, and new trade measures mean that central banks will not easily make overly long-term plans or forecasts.
“In the face of unusual uncertainty, policymakers are proceeding with caution, paying particular attention to risks,” McCallum said. He added that the Bank of Canada will continue to support economic growth while ensuring that inflation remains within a manageable range.
(Source)