Inflation risks and “usually high uncertainty” cloud the Bank’s vision, leaving interest rates on hold.

It appears that uncertainty hung over the Governing Council. With a more optimistic view on first quarter growth, keeping the policy rate unchanged clearly shows they’re uneasy about where prices are headed. On one hand, they acknowledge that things are soft, especially in the labour market, and that recent tariffs are starting to bite. On the other, they’re worried enough about rising prices to hold before the economy really slows. They’re essentially staring at the data and saying, if things deteriorate by July, we’ll move. The path of policy remains lower, but it’s uncertain exactly where it will end up. This hold adds more heat to their July decision. 

The Bank of Canada held its policy rate at 2.75% for the second consecutive meeting, citing “usually high uncertainty” and acknowledging that growth has been “softer rather than sharply weaker”, consistent with incoming data.

Market participants largely anticipated the hold decision. Governing Council was unanimous on holding rates, but there was divergence in views on the future path of the policy rate. If uncertainty persists and starts to weigh on Canadian economic conditions—with inflation contained—the Bank indicated lower rates are in the cards.

Core inflation measures moved above the top of the Bank’s inflation-control range, and inflation excluding taxes also rose above the Bank’s forecast. However, the removal of the consumer carbon tax should push headline inflation lower over the year.

Looking ahead, the Bank will remain data-dependent and less forward-looking than usual. Although recent incoming data have been stronger than expected, the Bank forecasts next quarter’s growth to fall somewhere between the scenarios outlined in its April Monetary Policy Report, which expects the economy to contract between zero and 1.25% in Q2.

In isolation, the shift in the balance of risks toward higher inflation and stronger growth supports the Bank’s decision. Still, the overall trajectory of rates is more likely to be lower, even though the exact timing and magnitude remain highly uncertain.

From our perspective, the Bank should’ve resumed easing in June. Going forward, pressure will mount for a rate cut in July, particularly if economic conditions deteriorate as we expect. Finally, rates on hold increases the opportunity cost, risks slowing growth prospects, and leaves the economy vulnerable to a sharper slowdown from U.S. tariffs