The Bank of Canada held its overnight rate at 2.75% on Wednesday morning, citing the effects of US tariffs and economic growth in Canada performing better than expected. In a statement, the bank said, “In Canada, economic growth in the first quarter came in at 2.2%, slightly stronger than the bank had forecast, while the composition of gross domestic product (GDP) growth was largely as expected.” “The pull-forward of exports to the United States and inventory accumulation boosted activity, with final domestic demand roughly flat. Strong spending on machinery and equipment held up growth in business investment by more than expected.” “Consumption slowed from its very strong fourth-quarter pace but continued to grow despite a large drop in consumer confidence. Housing activity was down, driven by a sharp contraction in resales, while government spending also declined.” “The labour market has weakened, particularly in trade-intensive sectors, and unemployment has risen to 6.9%. The economy is expected to be considerably weaker in the second quarter, with the strength in exports and inventories reversing and final domestic demand remaining subdued.” Addressing tariffs the bank said the US has been up and down on percentages, with a 50% tariff on all steel and aluminum going into the US, including from Canada, taking effect today. .“Bilateral trade negotiations have begun with a number of countries. However, the outcomes of these negotiations are highly uncertain, tariff rates are well above their levels at the beginning of 2025, and new trade actions are still being threatened. Uncertainty remains high,” said the bank in its statement. The bank expects the Canadian economy to weaken noticeably over the second quarter, with reversals in the strength of exports and inventories and final domestic demand remaining subdued. “CPI inflation eased to 1.7% in April, as the elimination of the federal consumer carbon tax reduced inflation by 0.6 percentage points,” said the bank. “Excluding taxes, inflation rose 2.3% in April, slightly stronger than the bank had expected. The bank’s preferred measures of core inflation, as well as other measures of underlying inflation, moved up.” “Recent surveys indicate that households continue to expect that tariffs will raise prices and many businesses say they intend to pass on the costs of higher tariffs. The bank will be watching all these indicators closely to gauge how inflationary pressures are evolving.” .Meanwhile, the bank says it is going forward with its eye on risks and uncertainties hovering over the Canadian economy, including, “the extent to which higher US tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve.” The next bank announcement is July 30, followed by one on Sept. 17
