OTTAWA—The Bank of Canada has maintained its key interest rate at 2.75 percent for the second time in a row, saying uncertainty around tariffs remains high but Canada’s economic growth was slightly higher than expected in the first quarter of the year.
“Uncertainty remains high, the Canadian economy is softer but not sharply weaker, and we’ve seen some firmness in recent inflation data. Against this backdrop, we decided to hold the policy rate unchanged as we continue to gain more information on U.S. trade policy,” Bank of Canada Governor Tiff Macklem said on June 4.
Similar to the Bank’s decision to hold interest rates steady back in April, Macklem told reporters that there is uncertainty about the impact of U.S. tariffs on Canada’s economy. He noted that since the last decision, the U.S. and China had stepped back from “extremely high” tariffs and bilateral trade negotiations have begun with many countries.
However, the Bank of Canada governor said tariffs still remain higher than at the beginning of the year, and the U.S. has continued threatening further tariffs. U.S. President Donald Trump has doubled steel and aluminum tariffs from 25 percent to 50 percent on June 4, which Macklem said underscores the “unpredictability” of U.S. trade policy.
Economic growth in Canada came in at 2.2 percent in the first quarter of the year, with high spending on machinery and equipment pulling up business investment and consumption continuing to grow. The Bank noted that housing activity and government spending was down, while unemployment grew to 6.9 percent, and it believes the economy will be weaker in the second quarter of the year.
The Bank also said the global economy has shown “resiliency” in recent months, which it attributed to a surge in trade activity to get ahead of American tariffs. It said the U.S. has had strong domestic demand and slightly lower inflation, Europe has seen economic growth propped up by imports and the promise of higher defence spending, while China’s economy has slowed as fiscal supports end and exports to the U.S. decrease.
Higher Inflation
Inflation in Canada fell to 1.7 percent in April due to the end of the federal carbon tax, down from 2.3 percent in March. Without including taxes, inflation would have stayed steady, surpassing the Bank’s expectation. The Bank said higher goods prices could be due to disruptions in trade, and many businesses have reported they will be facing higher costs as they look for alternative suppliers and markets to sell to.
The Bank noted that recent surveys showed businesses plan to pass on higher costs to consumers, and households believe that they will see higher prices. “The Bank will be watching the measures of underlying inflation closely to gauge how inflationary pressures are evolving,” Macklem said….