The Bank of Canada (BoC) is poised to maintain its key interest rate at 2.75% during its upcoming June 2025 meeting, according to a Reuters poll of economists.
This decision comes amid robust economic growth in the first quarter of 2025, driven by a surge in exports as businesses braced for U.S. tariff increases.
However, with looming economic challenges, including potential tariff impacts and signs of weakening domestic demand, the central bank is expected to resume rate cuts later this year.
This article delves into the BoC’s current stance, the economic factors at play, and what lies ahead for Canada’s monetary policy, offering a comprehensive look at why this decision matters for Canadians and the global economy.
Table of Contents
Why the Bank of Canada Is Holding Rates at 2.75%
The decision to keep interest rates steady at 2.75% reflects a cautious approach by the BoC, driven by recent economic data.
In Q1 2025, Canada’s economy grew at an annualized rate of 2.2%, surpassing expectations.
This growth was largely fueled by a spike in exports, as U.S. companies stockpiled Canadian goods ahead of new tariffs announced by U.S. President Donald Trump.
These tariffs, set to double on steel and aluminum to 50%, have introduced significant uncertainty into Canada’s economic outlook.
Despite the strong headline growth, underlying weaknesses in the economy, such as declining household spending and soft domestic demand, suggest a slowdown may be on the horizon.
Core inflation, which is hovering near the upper end of the BoC’s 1-3% target range, also supports the case for a pause.
According to Douglas Porter, chief economist at BMO Capital Markets, “There isn’t urgency from the growth numbers, and there is caution from the core inflation numbers.”
This sentiment was echoed by over 75% of economists polled by Reuters, who predict the BoC will hold rates steady for the second consecutive meeting.
Economic Context: A Balancing Act for the BoC
The BoC’s decision comes at a critical juncture.
While the economy showed resilience in Q1, the factors driving this growth are unlikely to persist.
The export surge was a preemptive response to tariff threats, and businesses are now bracing for reduced demand as trade barriers intensify.
Additionally, recent data points to emerging weaknesses.
April 2025 saw economic growth slow to just 0.1%, and the unemployment rate climbed to 6.9%, with significant job losses in the trade-sensitive manufacturing sector.
BoC Governor Tiff Macklem has acknowledged the potential for a growth slowdown in the coming quarters.
At the G7 Finance Ministers’ Summit in Kananaskis, Alberta, Macklem noted that the first-quarter growth was expected but warned that subsequent months could be “quite a bit weaker.”
This cautious outlook is compounded by the BoC’s decision to pause formal economic forecasts until July, reflecting the uncertainty surrounding U.S. trade policies and their impact on Canada.
The Tariff Threat and Its Implications
The re-election of Donald Trump and his aggressive trade policies have cast a long shadow over Canada’s economy.
The announcement of 50% tariffs on steel and aluminum, effective from June 2025, has heightened concerns about trade disruptions.
Canada, a major exporter of these materials to the U.S., faces significant risks.
The BoC’s business surveys from April 2025 revealed a sharp decline in business sentiment, with many firms halting investment and hiring plans due to tariff-related uncertainty.
This external pressure adds complexity to the BoC’s monetary policy decisions.
Lowering interest rates could stimulate spending and cushion the economy against a tariff-induced slowdown, but it also risks exacerbating inflationary pressures.
Conversely, maintaining higher rates could dampen economic activity further, especially if businesses and consumers scale back spending in anticipation of tougher economic conditions.
What Economists Are Saying
The Reuters poll highlights a strong consensus for a rate hold in June, with 20 of 26 economists surveyed expecting no change.
This aligns with market expectations, as interest rate futures also point to a pause. However, opinions diverge on the BoC’s path forward.
Nearly 75% of economists anticipate at least two more rate cuts in 2025, with some forecasting as many as three or four reductions.
This would bring the policy rate closer to 2%, a level seen as more supportive of economic growth in the face of potential recessionary pressures.
Andrew Kelvin, head of Canadian and global rates strategy at TD Securities, emphasized the need for further cuts, stating, “Canadian growth is likely to slow sharply through the middle part of the year, justifying further rate reductions.”
Similarly, Stephen Brown of Capital Economics advocated for a June cut as “insurance” against downside risks, arguing that signaling support for the economy could prevent a self-fulfilling cycle of reduced spending.
In contrast, economists like Avery Shenfeld of CIBC expect the BoC to hold firm in June but remain open to future cuts. Shenfeld noted, “The BoC won’t deliver a cut just yet, having signaled that it’s less willing to be forward-looking amidst considerable uncertainty.”
This cautious stance reflects the delicate balance the BoC must strike between supporting growth and containing inflation.
The Risk of Recession
Economic projections paint a challenging picture for Canada.
Poll medians suggest the economy will contract by 1.0% this quarter and 0.5% in the next, meeting the technical definition of a recession.
These forecasts are driven by the anticipated impact of tariffs, reduced business investment, and weaker consumer spending.
The April jobs report, which showed a loss of 31,000 manufacturing jobs, underscores the vulnerability of trade-dependent sectors.
Andrew DiCapua of the Canadian Chamber of Commerce described the BoC’s predicament as a “mission impossible.”
He argued that resuming rate cuts to lower the policy rate to around 2% would help cushion the economy against external shocks.
However, he acknowledged the risk of reigniting inflation, particularly as recent data showed price pressures building.
The Psychological Factor
Beyond economic data, the BoC’s messaging plays a critical role in shaping business and consumer confidence.
A decision to hold rates steady could signal caution, potentially leading to further retrenchment in spending and investment.
Stephen Brown highlighted this “psychological” dimension, noting that a rate cut could reassure businesses and consumers that the BoC is proactive in supporting the economy.
Conversely, prolonged high rates might reinforce fears of an impending downturn, exacerbating economic weakness.
What’s Next for the Bank of Canada?
Looking ahead, the BoC’s July meeting will be pivotal.
The central bank is expected to release updated economic forecasts, providing greater clarity on its outlook.
Many economists believe this could pave the way for renewed rate cuts, particularly if economic indicators continue to weaken.
The BoC’s cumulative 225 basis point cuts since June 2024 have already eased monetary policy significantly, but further reductions may be necessary to navigate the challenges posed by tariffs and slowing growth.
The BoC’s communication will also be closely watched.
Governor Macklem’s press conference following the June decision is expected to emphasize flexibility, leaving the door open for future rate adjustments.
As Shenfeld noted, “No one interest rate decision in isolation would ever be a fatal error, but the clock will start to tick louder on getting some interest rate relief if the economy remains soft.”
The BoC’s Path Forward
The Bank of Canada’s decision to hold interest rates at 2.75% in June 2025 reflects a prudent response to a complex economic landscape.
Strong Q1 growth, driven by export surges, has provided temporary relief, but looming tariffs, weakening domestic demand, and rising inflation pose significant challenges.
With economists forecasting at least two more rate cuts this year, the BoC is poised to resume easing monetary policy as early as July to support an economy at risk of recession.
As Canadians and global markets await the BoC’s next moves, the central bank’s ability to navigate these turbulent waters will be critical in shaping the country’s economic future.
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