Bank of Canada holds key rate steady, but says a future cut is possible

OTTAWA: The Bank of Canada on Wednesday held its key benchmark rate at 2.75%, citing the need to probe the effects of U.S. trade policy, but said another cut might be necessary if the economy weakened in the face of tariffs.

The decision marks the second time in a row that the central bank has remained on the sidelines after an aggressive cutting cycle which shrunk rates by 225 basis points over nine months.

“The trade conflict initiated by the United States remains the biggest headwind facing the Canadian economy,” Governor Tiff Macklem told a news conference, describing U.S. trade policy as highly unpredictable.

“There was a clear consensus to hold policy unchanged as we gain more information,” he said.

U.S. President Donald Trump on Wednesday doubled the tariff on imports of Canadian steel and aluminum to 50%.

The bank says it is weighing upward pressure on inflation from higher prices and downward pressure from sluggish growth.

Macklem said the Canadian economy had been softer but not sharply weaker, while noting that underlying inflation might be stronger than the bank had suspected.

“On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued U.S. tariffs and uncertainty, and cost pressures on inflation are contained,” he said.

Canada’s annual inflation rate fell to 1.7% in April due to a drop in energy prices, but closely tracked core measures of inflation rose above the bank’s target range of 1% to 3% in the same month.

“Higher core inflation can be partly attributed to higher goods prices, including food, and may reflect the effects of trade disruption,” Macklem said.

Economists had predicted the bank would most likely hold its key policy rate in June, seeking to prevent higher inflation.

Macklem said recent surveys showed consumers were bracing for higher prices and many businesses say they intend to pass on tariff costs.

Lingering uncertainty on the impact of tariffs, the outcome of trade negotiations and new trade actions means the bank will be less forward looking, Macklem said, repeating his comments from April.

“Faced with unusual uncertainty, Governing Council is proceeding carefully, with particular attention to the risks,” he said, adding that the BoC would continue to support economic growth while ensuring inflation remained under control.

First quarter growth was better than expected but the business investment and domestic spending were largely subdued. Economists predict this trend is likely to continue, and Macklem said second quarter growth would be substantially weaker.