The Bank of Canada (BoC) is at a critical juncture as it approaches its June 4, 2025, interest rate decision, with the latest April inflation data reshaping expectations for monetary policy.
While headline inflation eased to 1.7% from 2.3% in March, driven by the elimination of the federal consumer carbon tax and falling global oil prices, core inflation measures surged to an average of 3.15%, signaling persistent price pressures.
This has slashed the odds of a June rate cut from 64% to just under 35%, according to LSEG Data & Analytics.
With the benchmark interest rate steady at 2.75% since the BoC’s April 16 pause, Canadians are keenly watching how the central bank will balance economic slowdown, trade tensions, and inflationary pressures.
April Inflation Data: A Mixed Signal for Monetary Policy
Statistics Canada’s April 2025 Consumer Price Index (CPI) report revealed a complex economic picture.
Headline inflation fell to 1.7%, below the BoC’s 2% target and slightly above the 1.6% forecast by economists.
The decline was largely due to an 18.1% year-over-year drop in gasoline prices, fueled by the removal of the consumer carbon tax on April 1 and weaker global oil demand.
Natural gas prices also plummeted by 14.1%, further softening the headline figure.
However, when excluding energy, inflation rose to 2.9% from 2.5%, highlighting underlying pressures.
The BoC’s preferred core inflation measures—CPI-median and CPI-trim—rose to an average of 3.15%, the highest in a year, driven by rising costs in services, rent, and food.
Grocery prices increased by 3.8% annually, outpacing headline inflation for the third consecutive month, while travel tour prices jumped 6.7% year-over-year and 3.7% month-over-month.
These trends, combined with a weaker Canadian dollar and ongoing U.S. tariff disputes, suggest that cost-push inflation from supply chain disruptions is intensifying.
“The jump in core inflation complicates the Bank of Canada’s path,” said David Rosenberg, founder of Rosenberg Research, noting that services inflation, particularly travel services at 8.7% month-over-month, is a key concern.
Benjamin Reitzes, Managing Director at BMO Capital Markets, added, “This is a challenging backdrop for the BoC to continue cutting rates in the near term.”
Economic Context: Trade Tensions and Labour Market Strain
Canada’s economy is grappling with significant headwinds, particularly from its trade war with the United States.
U.S. tariffs on Canadian exports, coupled with Canada’s retaliatory measures, have hit trade-sensitive sectors like manufacturing, pushing the unemployment rate to 6.9% in April 2025—the highest since January 2017, excluding the pandemic period.
The economy added just 7,400 jobs, well below the 10,000 expected, with private-sector weakness raising recession fears.
Despite first-quarter GDP growth projected at 1.8%, the BoC anticipates a potential contraction in the second quarter if trade disputes persist.
Governor Tiff Macklem emphasized in April that monetary policy cannot directly counter trade war effects but must prioritize price stability.
The BoC’s April 16 decision to hold rates at 2.75%—its first pause after seven consecutive cuts since June 2024—reflected this cautious stance, with Macklem noting the need for clarity on U.S. trade policy impacts.
Posts on X reflect mixed sentiment, with users like @eppman noting the probability of a June rate cut falling from 70% to 40% due to core inflation rising to 3.2% year-over-year.
Others, like @CristianEnacheX, peg the cut probability at 60%, citing economic weakening despite tariff uncertainty.
Economist and Market Perspectives
Economists are split on the BoC’s next move.
TD Economics’ Andrew Hencic described the April inflation report as “complicating” but maintained a forecast for two additional 25-basis-point cuts in 2025, potentially lowering the rate to 2.25% by year-end.
CIBC’s Andrew Grantham suggested that a contractionary GDP report, due May 30, could push the BoC toward a June cut, despite core inflation concerns.
Conversely, Scotiabank’s Derek Holt argued that upside inflation risks and potential fiscal stimulus make a pause more likely throughout 2025.
Royce Mendes of Desjardins Capital Markets sees room for a 25-basis-point cut in June, citing the BoC’s dovish April tone and signs of economic weakness in housing and manufacturing.
However, RBC’s Eric Lascelles emphasized that tariffs, while inflationary, also dampen growth, creating a delicate balancing act for the BoC.
Financial markets, per LSEG Data & Analytics, now price in a 35% chance of a June cut, down from 64% pre-inflation data.
Implications for Canadian Households and Businesses
The BoC’s interest rate decision has far-reaching effects.
For households with variable-rate mortgages, a hold at 2.75% maintains stable payments, while a cut could lower interest costs or shift more of fixed payments toward principal.
Fixed-rate mortgages, tied to bond yields, have seen upward pressure, with Canada’s two-year bond yield rising nearly 10 basis points to 2.63% after the inflation data.
Businesses face higher input costs from tariffs and a weaker loonie, which may be passed on to consumers, as evidenced by rising grocery prices.
The BoC’s challenge is to manage these inflationary pressures without exacerbating economic slowdown, particularly in interest-rate-sensitive sectors like housing and consumer spending.
What’s Next for the Bank of Canada Interest Rate?
The May 30 GDP release will be a key determinant.
A contractionary report could strengthen the case for a June cut, as suggested by Grantham and Mendes.
However, persistent core inflation above 3% may push the BoC to hold rates, as Rosenberg and Holt argue, to avoid fueling price expectations.
The BoC’s April Monetary Policy Report outlined two scenarios: one with limited tariffs and stable 2% inflation, and another with a prolonged trade war leading to a recession and inflation above 3%.
Current data suggests Canada is between these scenarios, with Macklem advocating a “flexible and adaptable” approach.
Looking ahead, the BoC’s July 30 decision, accompanied by the next Monetary Policy Report, will provide further clarity.
If core inflation remains elevated or GDP signals a deeper slowdown, the BoC may adjust its path, potentially cutting rates to 2% by year-end, as forecasted by TD Economics and Desjardins.
The Bank of Canada’s June 2025 interest rate decision hinges on balancing rising core inflation against economic weakness exacerbated by U.S. tariffs.
While headline inflation’s drop to 1.7% offers some relief, core measures at 3.15% signal challenges ahead.
With unemployment at 6.9% and GDP growth at risk, the BoC must tread carefully.
Canadians, from homeowners to business owners, await clarity on whether rates will hold or ease, with the May 30 GDP data likely to tip the scales.
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