Author: Matthew Horwood<\/p>\n\n\n\n
OTTAWA\u2014The Bank of Canada has maintained its key interest rate at 2.75 percent for the second time in a row, saying uncertainty around tariffs remains high but that Canada\u2019s economic growth was slightly higher than expected in the first quarter of the year.<\/p>\n\n\n\n
\u201cUncertainty remains high, the Canadian economy is softer but not sharply weaker, and we\u2019ve seen some firmness in recent inflation data,\u201d said Bank of Canada Governor Tiff Macklem on June 4. \u201cAgainst this backdrop, we decided to hold the policy rate unchanged as we continue to gain more information on U.S. trade policy.\u201d<\/p>\n\n\n\n
Similar to the Bank\u2019s decision to hold interest rates steady in April, Macklem told reporters that there is uncertainty about the impact of U.S. tariffs on Canada\u2019s economy. He noted that since the last decision, the United States and China had stepped back from \u201cextremely high\u201d tariffs and bilateral trade negotiations have begun with many countries.<\/p>\n\n\n\n
Macklem noted tariffs still remain higher than at the beginning of the year, and the United States has continued threatening further levies. U.S. President Donald Trump doubled steel and aluminum tariffs from 25 percent to 50 percent on June 4, which Macklem said underscores the \u201cunpredictability\u201d of U.S. trade policy.<\/p>\n\n\n\n
Economic growth in Canada came in at 2.2 percent in the first quarter of the year, with high spending on machinery and equipment pulling up business investment and consumption continuing to grow. The Bank noted that housing activity and government spending was down, while unemployment grew to 6.9 percent, and the economy is expected to be weaker in the second quarter of the year.<\/p>\n\n\n\n
The Bank also said the global economy has shown \u201cresiliency\u201d in recent months, which it attributed to a surge in trade activity to get ahead of American tariffs. It said the U.S. has had strong domestic demand and slightly lower inflation, Europe has seen economic growth propped up by imports and the promise of higher defence spending, while China\u2019s economy has slowed as fiscal supports end and exports to the United States decrease.<\/p>\n\n\n\n
Inflation in Canada fell to 1.7 percent in April due to the end of the federal carbon tax, down from 2.3 percent in March. Excluding taxes, inflation would have stayed steady, surpassing the Bank\u2019s expectation. The Bank said higher goods prices could be due to disruptions in trade, and many businesses have reported they will be facing higher costs as they look for alternative suppliers and markets. <\/p>\n\n\n\n
The Bank noted that recent surveys showed businesses plan to pass on higher costs to consumers, and consumers expect that they will see higher prices as a result. \u201cThe Bank will be watching the measures of underlying inflation closely to gauge how inflationary pressures are evolving,\u201d Macklem said.<\/p>\n\n\n\n
Macklem said while there was a \u201cclear consensus\u201d among the Bank\u2019s governing council to keep rates unchanged in June, several members believed rates could be reduced if Canada\u2019s economy weakens further due to U.S. tariffs but inflation remains low. The Bank will continue to examine how U.S. tariffs reduce demand for Canadian exports, how this impacts business investment and household spending, and how quickly cost increases are passed on to consumers.<\/p>\n\n\n\n
\u201cFaced with unusual uncertainty, the governing council is proceeding carefully, with particular attention to the risks. This means we are being less forward-looking than usual,\u201d Macklem said.<\/p>\n\n\n\n