The Bank of Canada is expected to hold its benchmark interest rate steady at 2.75% on Wednesday, after growth in the first quarter turned out stronger than many anticipated, reducing the urgency for monetary easing.
At least 75% of economists forecast the central bank to keep its rates steady this week, a Reuters poll of 26 showed, in line with the market’s forecast.
The economy expanded at an annualised 2.2% in Q1, beating previous estimates.
This bounce was mainly driven by higher exports, as US firms rushed to purchase more Canadian products ahead of a fresh wave of American tariffs.
The growth spurt has temporarily altered the BoC’s calculus by tempting policymakers to postpone any further cuts to interest rates in the face of further weakness in domestic demand.
Tariff tensions loom over fragile recovery
The headline number on GDP suggests some strength, but the underlying dynamics look weak.
Household spending is still subdued, and domestic demand is still putting a lid on the strength of the economy.
More recently, a risk from US President Donald Trump, who announced plans to hike tariffs on imported steel and aluminium to 50%, poses a direct threat to Canadian exporters and could weigh on growth in the next quarters.
Recent trade strength may be deceptive. Analysts caution that the export-driven boost is temporary and masks underlying economic vulnerabilities.
Inflation and July Outlook Keep Bank on Hold—for Now
Inflation is another important reason for the BoC’s expected decision to hold.
Core inflation is approaching the higher end of the bank’s 1-3% goal range, lessening the need to loosen policy further at this time.
The central bank has slashed interest rates by 225 basis points since June 2024, delivering significant support.
Holding rates stable today allows us to examine the lag effects of prior cuts.
Furthermore, the BoC will revise its economic forecasts in July. That forecast refresh gives an ideal opportunity for policy reappraisal. Until then, officials appear to prefer to wait and collect more facts before making their next step.
Despite the short-term pause, further cuts are expected
Despite the anticipated halt this week, economists generally agree that the easing cycle has not ended.
Almost 75% of the 23 analysts polled by Reuters for a full-year view foresee at least two additional cutbacks by the end of 2025.
Eight predict two cutbacks, seven expect three, and two foresee four more cuts.
This speaks to continued forecasts of a slowing economy that would eventually demand additional monetary support.
This is consistent with previous economic estimates, which suggest a downturn ahead.
GDP is expected to fall by 1.0% in the second quarter and 0.5% in the third quarter.
If realised, such data would meet the technical criteria for a recession, supporting the case for more easing later this year.
Central Bank walking a tightrope amid uncertainty
The BoC is now in the precarious position of balancing short-lived economic strength with medium-term caution.
Governor Tiff Macklem has warned before of possible slowdowns, and with plenty of tariff-driven friction set to hit the economy, the bank is keeping the door open to do more on the easing front.
However, the BoC does not seem willing to get ahead of the data, and while a rate cut could be warranted by forward-looking risks, the BoC seems unwilling to act until there is more definitive evidence.
For now, however, financial markets and households will be on the lookout to establish whether the growth surge in the first quarter of 2025 was to take over as the core or remain a one-off occurrence.
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