The Bank of Canada (BoC) will meet on Wednesday, June 4, at 17:45 GMT+4. The BoC is expected to hold rates steady at 2.75% as the central bank attempts to strike a balance between strong domestic growth, inflationary pressures, a weak labor market, and global uncertainties stemming from US tariffs.
Economic Data Show a Mixed Picture
Expectations of a rate hold come after 7 consecutive rate cuts from the Bank of Canada, totaling 225 basis points, with 2 cuts already made in 2025. The expected rate hold could indicate caution.
Canada’s Q1 GDP report grew 2.2% QoQ, which exceeded analysts’ expectations of 1.7%. Exports rose 1.6% in Q1, driven by high demand for cars and industrial machinery. March GDP came in at 0.1%, rebounding from a 0.2% contraction in February, driven by strong performances from the construction, mining, quarrying, and oil and gas extraction sectors. ⁽¹⁾
However, the labor market showed mixed data, as the unemployment rate rose to 7% while jobs added in April rose to 7.4k. ⁽²⁾
Further challenges come into play with a widening trade deficit brought on by decreased energy prices and US tariffs. Household spending and saving are slowing due to weaker income gains. Meanwhile, domestic demand is still weak. Q1 showed an 18.6% quarterly decrease in housing sales activity, the biggest in three years, and a 0.1% yearly decline in final domestic demand, excluding inventories and net exports. ⁽³⁾
Inflation remains a concern for the BoC as core inflation in April came in at 2.5%, rising back above the central bank’s target. The central bank may therefore look to act with caution around the resurgence of inflation. Headline inflation came in at 1.7%, which showed a decline after a rise in March. ⁽⁴⁾
Breaking Down the Decision and Future Outlook
With core inflation rebounding above the Bank of Canada’s target and a strong Q1 GDP report, these factors could support the case for holding interest rates steady.
However, the BoC is still awaiting clarity on the evolving US tariff situation, which began in early March 2025 and has since seen adjustments and exemptions. Speculators have priced in a 75% probability of a rate hold for June 4. ⁽⁵⁾
Economists also forecast a 25-basis point rate cut in July, expecting the Canadian economy to slow down due to trade disruptions. ⁽⁶⁾
The Bank of Canada’s upcoming press conference with Governor Macklem is expected to provide further clarity on its strategies, particularly regarding inflation and trade uncertainties.
Bank of Canada’s Navigation Through Trade and Tariffs
Canada’s monetary policy decisions are deeply tied with global economic changes. Due to US tariffs that affect Canada’s trade-sensitive steel, aluminum, and automotive industries, both importers and exporters have increased their front-loading activity, which has helped Q1 growth.
However, future trade flows are unpredictable because of these tariffs and Canada’s retaliatory actions. Canada’s trade deficit is further reduced by lower commodity prices, especially in the energy sector. ⁽⁷⁾
US President Donald Trump said on Friday that he planned to increase tariffs on imported steel and aluminum to 50% from 25%, raising pressure on global steel producers and deepening his trade war with Canada, which is one the largest steel and aluminum exporters.
Impact on the CAD
The less dovish stance by the BoC appears to be supporting the Canadian dollar, as previous decisions leaned heavily toward rate cuts. The BoC is leaning toward holding its interest rate steady, which could support the CAD due to inflationary pressures and strong growth.
