Bank of Canada Holds Key Rate Steady, Future Cut is Possible

• The Bank of Canada held its key benchmark rate at 2.75% last Wednesday, citing the need to probe the effects of U.S. trade policy, while cautioning that 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 last 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.
• Before the next BoC decision in July, there will be two more months of inflation data and one GDP data. "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," Governor Macklem said, in his opening remarks.
• Economists are expecting there could be between two and three more cuts this year and the final rate by the end year would likely end around 2%. "July looks more promising for a quarter point ease if, as we expect, the jobless rate continues to move higher, and inflation in items not subject to tariff pressures eases off a bit," said Avery Shenfeld, managing director and chief economist at CIBC in a note.

(Source: Reuters)