Tariffs, inflation and job losses keep the Bank cautious as rate cut calls grow louder
The Bank of Canada held its policy rate at 2.75 percent on Wednesday as it continues to monitor the dual effects of elevated inflation and tariff-related pressures, according to statements from Governor Tiff Macklem and reported economic data.
As per Macklem’s remarks in Ottawa, “The Canadian economy is softer but not sharply weaker. And we’ve seen some firmness in recent inflation data.”
The decision to keep rates unchanged came as the central bank weighs the ongoing impact of US tariffs and mixed signals across key economic indicators.
According to BNN Bloomberg, the rate hold follows seven consecutive cuts and comes amid a backdrop of conflicting data: GDP growth surprised to the upside in the first quarter while labour market indicators weakened, and inflation trends remained volatile.
Macklem stated, “There is some unusual volatility in inflation, but these measures suggest underlying inflation could be firmer than we thought.”
As reported by Financial Post, core inflation rose more than expected to 2.3 percent in April once the removal of the carbon tax is excluded.
Macklem said higher goods prices, including food, may reflect the effects of trade disruptions. He added that while it’s still early to assess the inflationary impact of tariffs, businesses are already incurring costs by shifting suppliers and seeking alternative markets.
“Certainly, what we hear from businesses is they’re looking for new suppliers to try to avoid tariffs… Those things have costs.”
Trade uncertainty continues to weigh heavily.
On Tuesday, US President Donald Trump signed an executive order doubling tariffs on steel and aluminum to 50 percent, effective the following day.
Tariffs on Canadian autos and other exports remain in place, despite partial exemptions under CUSMA.
Macklem described the trade conflict with the US as “the biggest headwind facing the Canadian economy.”
From a monetary policy standpoint, the Bank opted again not to publish a full forecast and instead reiterated its two-scenario framework.
In one scenario, a trade resolution sees modest growth averaging 1.6 percent through 2027; in the other, a prolonged trade war leads to four quarters of contraction averaging -1.2 percent.
Macklem said the economy is “somewhere in between the two scenarios” and suggested a clearer outlook may emerge by July, depending on trade developments.
Employment figures offered little reassurance. The unemployment rate rose to 6.9 percent in April, driven by losses in trade-intensive sectors such as manufacturing.
Macklem noted that employment has remained stable in less trade-exposed sectors, but businesses are signalling plans to scale back hiring. Economists expect the jobless rate to rise above seven percent.
Rosenberg Research Inc. president David Rosenberg said in a note that the slack in the labour market was already enough to warrant a rate cut.
“The less the bank does now, the more it will have to do later.”
Despite these pressures, the Bank held steady, with Macklem emphasizing that “faced with unusual uncertainty, governing council is proceeding carefully.”
He also acknowledged that some members of the council believe a rate cut may become necessary if economic conditions deteriorate further and inflation pressures remain contained.
As reported by BNN Bloomberg, Ed Devlin of Devlin Capital said the tone of the announcement leaned “more neutral than dovish.”
He warned that by holding at 2.75 percent, the Bank may be more restrictive than intended, and added, “There’s a non-insignificant risk that we get back to zero (percent interest rates)… So, if there’s an outcome you want to avoid at all costs… get going.”
Warren Lovely of National Bank Financial pointed to the broad uncertainty clouding the Bank’s judgement, saying there are mixed signals everywhere.
He noted that “headline inflation seems to be in control” but core inflation remains hot, and while the labour market had appeared healthy earlier, “now it looks weak.”
According to commentary shared with Wealth Professional, Keith Reading of Morguard said the key interest rate hold was expected, given the uncertain economic outlook.
He added that “business and consumer confidence remain low,” and the rate hold will likely “do little to change conditions in Canada’s housing market.”
Étienne Bordeleau Labrecque of Ninepoint Partners noted the pull-forward of activity ahead of tariffs and the distortions caused by stop-go trade policies, suggesting the Bank may hold until September to get a clearer picture of their impact.
He said the hold reflects inflation bounce-back and a wait for further evidence of economic weakness.
Xero economist Louise Southall said the Bank’s approach is not surprising, given the volatile environment.
“With rates at 2.75 percent, the Bank has the flexibility to cut quickly if required, including between official meeting dates,” she said in commentary provided to Wealth Professional.
She warned that such uncertainty could delay hiring and investment decisions for small business owners.
Data from NerdWallet Canada’s 2025 Consumer Credit Report shows that 74 percent of Canadians used credit cards to pay for essentials in the past year.
Commenting on the BoC’s decision, financial expert Shannon Terrell said, “Tariff costs are hitting store shelves and hammering the wallets of already overextended consumers.”
Mortgage expert Clay Jarvis added that while a rate cut might have helped variable-rate mortgage seekers, broader issues such as rising inflation, household debt, and geopolitical risk make rate relief insufficient.
According to Reuters, the Canadian dollar edged slightly lower to 72.86 US cents ahead of the decision, but outperformed other G10 currencies.
Oil prices rose 1.7 percent to US$63.58 a barrel.
The ongoing wildfires in Alberta have disrupted more than 344,000 barrels per day of oil sands production. Bond yields rose as well, with the 10-year yield increasing to 3.270 percent.
Reuters also reported that a majority of economists in a recent poll expect at least two more BoC rate cuts later this year, despite the current pause.
