Published on: June 5, 2025
Following a decision described as “sensitive,” the Bank of Canada (BoC) announced that it is maintaining its policy rate at its current level. The central bank had also opted for rate stability at its last meeting, after seven consecutive interest rate cuts.
Since the publication of the Monetary Policy Report in April, the Trump administration has continued to shift its various tariffs. The Governing Council therefore had to choose between a preventive cut in its key interest rate to help the economy cope with US tariffs or leaving its rate unchanged to get a clearer picture of the impact of the trade war.
During a press briefing, Governor Tiff Macklem cited the modest weakening of the Canadian economy and the recent surge in inflation, which exceeded expectations, as the basis for the bank’s decision. “Given the unusual uncertainty, the Bank is proceeding with caution, with a particular focus on risks,” he explained. The press release also emphasized that the Bank “will continue to assess the timing and strength of the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”
Here are a few observations made by the Bank of Canada following its June 4 decision:
The Bank appears to be recognizing the signs of reflation in the Canadian economy, as evidenced by its mention of an “unexpected” firmness in recent inflation data. However, this is most likely linked to poor productivity growth and excessive nominal wage growth, given the combination of weak productivity performance and excessive monetary policy easing. The result was reflation, which was evident in the data.
We have long argued that the Bank’s estimation of excess supply in the economy was based on a poorly calibrated population shock for total hours worked. The Bank clearly recognized the need to look beyond total CPI disinflation, which was distorted by a relative price shock resulting from the carbon tax and negative year-over-year energy prices.
Moreover, the Bank did not put too much emphasis on recent labour market weakness. Given recent data reflecting a very specific shock that has not impacted the Canadian labour market, this tone seemed appropriate.
The press release, the Bank analysis, and the Q&A session all lacked a mention of the current policy rate versus the long-run estimate. We would have liked the central bank to explain why inflation “surprised on the upside.” This appears to be the result of lowering the policy rate too quickly and too aggressively when nominal wage growth was high, and productivity growth was very low. Since then, Canadian firms have attempted to align real wage growth with productivity growth, which has helped the Bank achieve a better balance toward reaching price stability.