There is a diversity of views among members of the
Bank of Canada
’s governing council on the best path forward for
interest rates
as they assess the pressures that trade disruptions could have on inflation, according to a summary of their deliberations released on Tuesday.
“The weaker the economy and the more downward pressure on inflation, the more there would be a need to lower the policy interest rate further,” the deliberations said. “However, if the recent firmness in
underlying inflation
were to persist, it would be more difficult to cut the policy rate.”
The summary accounts for meetings that ran from May 30 until June 4, when the central bank decided to hold its policy rate at 2.75 per cent for the second time in a row.
Its decision was made after the
Canadian economy
beat expectations during the first quarter by growing at an annualized rate of 2.2 per cent. The strong growth was mainly due to a pull forward in exports as businesses attempted to beat United States President
Donald Trump’s tariffs.
Members of the governing council expect the second quarter to be weaker as domestic demand remains subdued.
In April, despite inflation coming in at 1.7 per cent, measures of core inflation came in hotter than expected.
“Members noted that measures of underlying inflation had come in higher than they expected since the beginning of the year,” the minutes said. “They agreed they would need to watch developments in inflation across CPI components carefully to gauge how inflationary pressures are evolving.”
During the rate announcement, Bank of Canada governor
Tiff Macklem
said higher core inflation can be partly attributed to higher prices for goods, including food, and may reflect the effects of trade being disrupted. But he said it was still too early to see the impact that retaliatory tariffs are having on the consumer price index.
In April, policymakers noted food prices increased by 3.8 per cent. They also discussed the price increase in services, with some noting it could be a one-time occurrence.
The council also discussed the survey results from its regional outreach, which showed businesses anticipated increased costs from tariffs and having to rework their supply chains.
“Many reported that they would be passing on these extra costs to their customers in the form of higher prices,” the minutes said.
The deteriorating labour market remains a concern, too. The unemployment rate hit 6.9 per cent in April, driven by job losses in trade-sensitive sectors such as manufacturing.
The situation worsened in May, with the unemployment rate climbing to seven per cent, the highest it has been since 2016.
“Data from the April Labour Force Survey did not indicate that the deterioration of labour market conditions in these sectors had spread to other sectors of the economy,” the deliberations said. “But this weakness had not been offset by strength in other sectors.”
During its April decision,
the central bank presented two scenarios as opposed to a forecast.
In the first scenario, a trade deal is achieved and tariffs are lifted, but growth stalls in the second quarter and then averages 1.6 per cent through the end of 2027. The second scenario assumes a protracted trade war, with gross domestic product contracting for four quarters, averaging about minus 1.2 per cent.
Looking forward, policymakers were encouraged by recent negotiations between the U.S. administration and other trade partners, which puts the likelihood of a protracted trade war outlined in its second scenario less likely.
However, members acknowledged U.S. trade policy remains uncertain, with Trump’s decision to double tariffs on aluminum and steel.
On June 4, Macklem said he was hopeful that the central bank could provide a firmer forecast for its July decision, but that uncertainty remains high.
“In light of the considerable uncertainty about trade policy and its impact on the Canadian economy and inflation, governing council members agreed to reiterate in their communications that they would proceed carefully by being less forward-looking than usual, with particular attention to the risks,” the minutes said.
• Email: jgowling@postmedia.com
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Bank of Canada's future path for interest rates still cloudy
2025-06-17 18:11:55
