Bank of Canada holds interest rate steady again amid trade war

Interest rates in Canada are staying put for now, after the Bank of Canada held its monetary policy steady on Wednesday.

The benchmark, or overnight, lending rate stands at 2.75 per cent, and represents the floor level of interest off of which banks can base their “prime” rate.

This is the second straight monetary policy meeting where the central bank opted to leave the benchmark rate unchanged, citing the uncertain economic outlook in a statement:

“With uncertainty about US tariffs still high…Governing Council decided to hold the policy rate as we gain more information on US trade policy and its impacts.”

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Following the announcement, Governor Tiff Macklem spoke about how he and other members of the council came to the decision.

“The Bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up in April,” said Macklem.

“There is some unusual volatility in inflation, but these measures suggest underlying inflation could be firmer than we thought.”

The consumer price index for the month of April showed that although inflation overall cooled more than expected, that was mainly the result of the removal of the consumer carbon tax.

Removing volatile sectors including energy and food for instance reveals the underlying trends the central bank monitors more closely known as “core” inflation — which actually increased more than expected in April.

When asked about the next round of reports on inflation for the months of May and June, Macklem responded: “Yes, we will be, looking at those carefully.”

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He added: “What I would stress is, CPI moved up in April and I think more significantly, if you look at our preferred measures of core (inflation)…what you can see is they all moved up in April. That has got our attention.”

If inflation cools down further that could lead the central bank to cut interest rates as early as next month, but U.S. President Donald Trump’s tariffs may have the reverse effect if businesses are forced to raise prices for consumers.

“You can definitely see the impact of tariffs,” said Macklem.

“The longer these tariffs go on, the longer this uncertainty goes on, the more it’s going to weigh on the Canadian economy, the more of that is going to put downward pressure on inflation. And we will be watching that very carefully. But we are also conscious that there are cost effects of tariffs.”

Canadian borrowers, especially those with variable rate mortgages are likely disappointed at the announcement considering a cut may have meant their monthly costs would be coming down, but most economists are still expecting at least one more cut this year.

“If inflation slows over the next couple of prints (we get two CPI releases and two jobs reports before the late-July meeting) and the economy slows as widely expected (we have much higher conviction on the latter than former), the door is still wide open for the Bank of Canada to cut rates in July,” says chief economist Doug Porter at the Bank of Montreal.

For those Canadians that may be waiting on the sidelines to purchase a home, it may not be worth waiting for interest rates to drop further to apply for a mortgage.

“It seems like a lot of people are sitting on the sidelines and watching for rates, which isn’t necessarily the best strategy,” says Patrick Smith, vice president of mortgages at TD Bank.

“When you talk to some of those customers, they’re actually expecting fixed rates to come down, and fixed rates have been very stubborn and this may be the lowest that fixed rates get.“

For businesses, especially small businesses, lower interest rates could mean more financial breathing room. If it’s more affordable to pay for business loans, then that could mean the difference between expanding operations and hiring new workers, and holding off on new projects and not only freezing hiring plans, but in some cases laying off current workers.

“We’ve noticed two in five of our small businesses have already had to raise prices and most did so very reluctantly — the last thing they want to do is be priced at an uncompetitive advantage compared to larger players in their space,” says chief growth officer Joel Cote at Merchant Growth.

Cote adds that those businesses have only raised their prices a minimal amount compared to their rising costs — meaning their profit margins may also be shrinking.

“(Prices for customers are rising) only up to 25 per cent, which means they’re absorbing 75 per cent of those costs in their margins. At the same time trying to figure out how do they move supply chains, how do the actually redistribute goods and also negotiate new contracts, and that’s a very multifaceted complex problem for them to manage when they’re already being kind of squeezed on the margin front so quickly.”

When asked about how unprecedented the trade war has been for the Bank of Canada in coming to these decisions Macklem said that “It’s difficult for us, but what I’m more worried about is it’s difficult for businesses that are faced with new rules of the game, every week,” he said.

“I’m much more worried about households who are worrying about the possibility that they’ll lose their job, they don’t want to pay higher prices, and trying to navigate how to find lower cost things — goods to buy that get around tariffs.”

Before the next opportunity for the central bank to update interest rates there will be even more economic data to analyze, including two reports on inflation with the CPI data for May and June, as well as two labour market reports starting with May on Friday. In addition, there will be a better indication of the economic impacts of Trump’s tariffs with further GDP results measuring growth.

“Future cuts will rest on evidence of growth remaining weak but also inflationary pressures being contained,” says economist Andrew Grantham at CIBC adding: “we also expect to see further evidence that the economy is weakening between now and the July meeting, particularly in the labour market.”

Grantham also says that he expects to see enough data over the next few weeks to warrant a rate cut in July of 25 basis points, or a quarter of a percentage point.

The May CPI report will be released on June 24, and the next interest rate announcement from the Bank of Canada comes on July 30.