The Bank of Canada (BoC) announced on Wednesday (4th) that it would keep its benchmark interest rate at 2.75%, aligning with market expectations. However, the central bank warned that if U.S. tariffs continue to impact the Canadian economy and lead to economic weakness with controlled inflationary pressures, there may be a need for rate cuts in the future.

This marks the second consecutive time the central bank has maintained its rate, and it represents the first pause in interest rate cuts since the beginning of its rate-cutting cycle last year. BoC Governor Tiff Macklem stated that although Canada's economy performed better than expected in the first quarter, U.S. President Trump's tariffs on Canadian steel and aluminum products severely impacted exports and consumer confidence. He noted that "the trade policies of the United States remain the largest headwind facing the Canadian economy."

In its statement, the central bank indicated that the decision-making committee unanimously agreed to pause any rate adjustments to await more information regarding U.S. tariff policies and their impact on the Canadian economy. The bank also stated that while the economy is slowing down, it has not experienced a sharp deterioration, and some recent core inflation data has exceeded expectations, which led to a decision to remain cautious.

According to official data, Canada's core inflation rate reached 3.2% in April, the highest level in over a year, primarily due to rising prices of certain goods, especially food prices affected by trade disruptions.

Macklem admitted that it remains challenging to discern the direct effects of retaliatory tariffs in the price data, but the BoC will continue to monitor how tariffs impact export demand, business investment, employment, and household spending while observing inflation expectations and the pass-through of tariff costs.

According to the post-meeting statement from the central bank, the current policy interest rate of 2.75% is considered the midpoint of what the bank deems the "neutral range," meaning it is neither stimulative nor restrictive to the economy. BoC officials also mentioned that if the economy further deteriorates under tariff pressures and inflationary pressures remain manageable, a further reduction in the policy interest rate may be warranted.

Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce (CIBC), believes that if unemployment continues to rise and inflation not affected by tariffs shows some relief, there could be an opportunity for a rate cut of 25 basis points in July. The Canadian economy faces multiple challenges.