The Bank of Canada held its key overnight lending rate steady at 2.75% on June 4, marking the second consecutive meeting without a change—an outcome that was fully anticipated by markets. In immediate response to the announcement, the Canadian dollar slipped slightly, with USD/CAD rising 10 pips to 1.3698.

Shortly after the decision, Governor Tiff Macklem addressed the media, stating that the central bank’s main priority remains price stability, especially amid global uncertainties. Although the policy committee unanimously supported the decision, Macklem acknowledged there are differing views within the group about the path ahead for interest rates.

A major reason for the Bank’s cautious stance is the looming uncertainty around potential new U.S. tariffs. Macklem pointed out that if economic growth begins to slow under the weight of trade tensions, and inflation remains under control, the bank would not rule out further rate cuts down the line. His comments immediately sparked market speculation about the possibility of renewed easing.

Looking at the data, Canada’s economy grew at an annualized rate of 2.2% in the first quarter—beating expectations. Yet Macklem cautioned that this strength may reflect “growth pulled forward,” and might not be sustainable. He also flagged signs of weakness in the labor market, particularly in industries tied to exports, where layoffs are beginning to surface.

Inflation remains a mixed picture. While headline CPI eased to 1.7% in April, the central bank’s preferred core measure edged up to 2.3%, slightly above forecasts. Macklem noted that despite the slowdown in overall inflation, lingering pressures in core data justify the Bank’s measured approach and reluctance to loosen policy further.

Since the start of 2024, the Bank of Canada had cut interest rates seven times, totaling 225 basis points, with the most recent cut in March. But the pause in April reflected rising global uncertainty and mounting concerns around U.S. trade actions, prompting a more cautious posture.

A recent Reuters poll showed that about 75% of economists expect at least two more rate cuts before the end of 2025, though a handful anticipate as many as four. Much hinges on how U.S. tariff plans unfold and whether they significantly impact Canadian exports. Macklem made it clear: “U.S. policy is already putting pressure on Canada’s economic outlook and elevating inflation expectations. Holding the rate steady is a prudent move at this point.”

In summary, the Bank of Canada’s decision to hold rates reflects a balancing act in a landscape of mixed domestic data and heightened global risks. With uncertainty around U.S. trade policy, Federal Reserve action, and geopolitical tensions, as well as ambiguity around Canada’s own inflation and growth resilience, the Bank’s next steps will remain a key focus for markets.