Bank of Canada Holds Key Interest Rate — But More Cuts Likely Ahead

After months of reductions, the Bank of Canada is hitting pause.

On May 1, the Bank of Canada (BoC) announced it is holding its key interest rate steady at 2.75%, ending a streak of seven consecutive cuts that began in June 2024. The decision comes amid growing global uncertainty — particularly regarding U.S. trade policy and potential new tariffs.

Despite weaker-than-expected inflation data and signs of a slowing Canadian economy, Governor Tiff Macklem said the Bank is choosing caution while awaiting clearer signals from the global stage.

“A lot has happened since our March decision,” Macklem said. “But the future is no clearer.”

Why Hold the Rate?

The Bank pointed to a significant slowdown in both business investment and household spending. For Q1 2025, domestic demand is expected to remain flat, with GDP growth around 1.8% — and even weaker numbers likely for the second quarter.

Employment also dipped in March, with many companies slowing down their hiring. Still, the Bank opted not to cut again, choosing to wait and monitor how trade tensions evolve.

Two Economic Scenarios

In its latest Monetary Policy Report, the BoC did something unusual: it laid out two possible economic scenarios rather than a single forecast:

1. Optimistic Scenario: Trade talks succeed soon, inflation stays near target, but economic activity remains cautious.
2. Pessimistic Scenario: A global trade war causes a year-long recession and inflation rises above 3% due to higher costs from tariffs.

Macklem says current U.S. policy appears to fall somewhere in the middle, but it could easily shift either way.

“A weaker economy pushes inflation down, but tariffs drive costs up. That makes inflation forecasting extremely difficult right now.”

More Rate Cuts Ahead?

Most economists agree the Bank could resume rate cuts at its next meeting on June 4.

• CIBC anticipates a 25-basis-point cut unless trade risks ease quickly.
• Desjardins sees potential for a larger cut if economic data worsens.
• BMO emphasizes that the BoC is in reactive mode and will respond to changes in real time.

Looking ahead, forecasts differ:

• Desjardins expects the policy rate to drop to 1.75% by year-end.
• TD Economics predicts just 50 basis points of additional easing.
• BMO sees rates falling slightly below the neutral range, which the BoC estimates at 2.25% to 3.25%.

What Does This Mean for You, as a Consumer?

In short: Interest rates remain low, but economic uncertainty is high.

Here’s what you should know:

• Homeowners and buyers: Mortgage rates could continue to decline in the coming months. If you have a variable rate, you may see lower monthly payments. If you’re considering buying, this may be a good opportunity to act — but stay informed as conditions can shift quickly.
• Everyday consumers: An economic slowdown could affect job security, wages, and overall consumer confidence. Be cautious with spending and avoid taking on too much variable-rate debt until the outlook stabilizes.
• Investors: Markets may remain volatile as trade tensions unfold. Central bank decisions will impact bonds, fixed-income products, and investment returns — so stay diversified and up to date.

Bottom line: This is the perfect time to review your financial strategy, evaluate your upcoming plans, and speak with an expert if needed.

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