BoC stays at 2.75% while core inflation heats up and firms prepare to pass on tariff costs
The Bank of Canada held its benchmark interest rate at 2.75 percent on Wednesday, citing conflicting data and heightened trade uncertainty, particularly from new US tariffs, as the main reasons behind its decision.
According to governor Tiff Macklem, the trade conflict with the United States remains “the biggest headwind facing the Canadian economy,” and inflation data suggest underlying pressures may be firmer than expected.
As reported by Financial Post, Macklem said in prepared remarks, “The Canadian economy is softer but not sharply weaker. And we’ve seen some firmness in recent inflation data.”
He added, “Against this backdrop, we decided to hold the policy rate unchanged as we continue to gain more information on US trade policy and its impacts.”
The bank’s preferred inflation gauge — core inflation — rose above expectations, coming in at 2.3 percent in April after removing the carbon tax, while headline inflation stood at 1.7 percent.
Macklem noted that “higher core inflation can be partly attributed to higher goods prices, including food, and may reflect effects of trade disruption.” He acknowledged that it is too early to quantify the inflationary impact of tariffs but stated the costs to businesses are evident.
Macklem said businesses are looking for new suppliers to try to avoid tariffs, and noted that those decisions come with costs.
The Bank of Canada’s recent survey data indicated that many firms plan to pass these higher costs on to consumers, and that hiring plans are being scaled back.
The central bank expects growth to slow in the second quarter after GDP rose 2.2 percent in Q1 — a pace driven by a surge in exports to the US as firms attempted to beat tariff deadlines.
Macklem noted that “exports and inventories were strong but final domestic demand was roughly flat,” and while consumer spending continued, it slowed from Q4 and was affected by a drop in confidence.
As of Wednesday, US President Donald Trump had signed an executive order doubling tariffs on steel and aluminum imports from 25 percent to 50 percent, with other levies on Canadian goods still in place.
Macklem said these disruptions are creating “unusual volatility in inflation,” adding that the bank is watching closely as “governing council is proceeding carefully, with particular attention to the risks.”
The labour market showed further signs of strain in April, as the unemployment rate rose to 6.9 percent due to losses in trade-exposed sectors such as manufacturing.
Macklem said, “So far, employment has held up across sectors that are less exposed to trade,” but businesses are “generally telling us that they plan scale back hiring.”
Economists expect job losses to continue, with the unemployment rate projected to rise past 7 percent.
David Rosenberg of Rosenberg Research argued that the excess slack in the labour market justified a rate cut now. “The less the bank does now, the more it will have to do later,” he said.
BNN Bloomberg reported that analysts such as Ed Devlin of Devlin Capital viewed the Bank’s stance as more neutral than dovish. “They did kind of what you’d expect them to do,” he said, citing the absence of major changes since the last meeting.
Warren Lovely of National Bank Financial added that despite strong Q1 GDP, mixed signals in inflation, labour and housing created enough uncertainty to justify a hold.
“Headline inflation seems to be in control but core inflation’s hot,” he said. “The labour market earlier had been healthy, now it looks weak.”
The Bank had previously outlined two growth scenarios. In one, a trade deal lifts tariffs but GDP averages 1.6 percent through 2027.
In the other, a prolonged trade war results in four quarters of economic contraction, averaging -1.2 percent.
Macklem said the economy currently sits “somewhere in between the two scenarios” and a more definitive outlook could emerge by July, depending on US trade negotiations.
Morguard’s Keith Reading said to Wealth Professional that the hold was expected given persistent uncertainty and low confidence. He said it was unlikely to significantly affect Canada’s housing market.
Ninepoint Partners’ Étienne Bordeleau Labrecque noted the Bank may hold until September as it waits for distortions from the stop-start trade war to ease.
He added to Wealth Professional that further evidence of economic weakness will be needed before the BoC acts again.
Louise Southall, economist at Xero, told Wealth Professional the Bank has room to cut between scheduled meetings if needed, but that volatility in US policy is making economic forecasting more difficult.
She warned that uncertainty could cause businesses to delay hiring or investment, which could further dampen growth.
NerdWallet Canada’s Shannon Terrell said 74 percent of Canadians used credit cards to cover essentials in the past year, based on its 2025 Consumer Credit Report.
She said the rate hold reflects the bank’s awareness of the “precarious pressures” facing consumers.
Mortgage expert Clay Jarvis added that a single rate cut would not be enough to revive the housing market given broader challenges such as debt, inflation and trade unpredictability.
