In its latest monetary policy decision, the Bank of Canada has chosen once again to hold its key interest rate steady at 2.75%. This marks a continued pause in its rate tightening cycle, as the central bank balances concerns over persistent core inflation with rising uncertainty in global trade dynamics, particularly from the United States.

Policy Decision Rationale

The Bank’s Governing Council stated: “We decided to hold the policy rate as we gain more information on US trade policy and its impacts.” This measured approach reflects the need to monitor evolving economic conditions before committing to any changes in borrowing costs. While headline inflation has significantly cooled, core inflation—which strips out volatile items like food and energy—continues to show signs of underlying strength.

Inflation Trends

Core inflation has accelerated to 3.2% year-over-year, up from 2.9% the previous quarter. This sustained upward pressure reflects a combination of higher shelter costs, rising service prices, and resilient consumer demand. Meanwhile, headline CPI has eased to 1.7%, now well below the Bank’s 2% target, indicating a divergence between core and overall price trends.

Economic Context

The Canadian economy has shown modest growth in recent months. GDP grew by 2.2% annualized in Q1 2025, driven by steady consumer spending and a moderate uptick in business investment. However, global uncertainties, especially around potential US tariffs and trade disruptions, have added a layer of caution to the Bank’s outlook.

Labour markets are showing signs of softening, with the national unemployment rate rising to 6.9%, a notable increase that suggests growing slack in the job market. Wage growth, averaging 4.3% annually, continues to add to inflationary pressures but may begin to moderate if labor market conditions weaken further.

Looking Ahead

Markets and economists are closely watching for the Bank’s next moves. While today’s decision reflects prudence, sustained core inflation may force the Bank’s hand later this year if price pressures persist. For now, the Bank of Canada is treading carefully, seeking to balance inflation control with economic stability amid a shifting global backdrop.

Stay tuned as we continue to monitor economic signals and future updates from the Bank of Canada.