The Bank of Canada maintained its key overnight rate at 2.25% on Wednesday, keeping the bank rate at 2.50% and the deposit rate at 2.20%. The decision comes as economic activity in Canada remains weak and uncertainty about U.S. trade policy persists, while the ongoing Middle East conflict has elevated oil prices. The central bank reiterated its commitment to prevent higher energy prices from becoming persistent inflation despite near-term pressures on headline inflation figures.
Bank of Canada Maintains Overnight Rate at 2.25%
The Bank of Canada held its key overnight rate at 2.25% on Wednesday, as expected. The bank rate stayed at 2.50% and the deposit rate remained at 2.20%. Following the announcement, the Canadian dollar rose to session highs before pulling back slightly. USD/CAD last traded at 1.3616 per U.S. dollar, down 0.24% on the session.
Gold fell to a session low of $5,755.11 per ounce in Canadian dollar terms in the minutes before the announcement. The yellow metal continued to trade near its lows afterward, with XAU/CAD last trading at $5,818.09 per ounce for a loss of 2.09% on the daily chart.
Canadian Economic Activity Shows Weakness in Q1
The Bank of Canada noted that the Middle East conflict is now in its fourth month. "The resulting increases in energy prices and disruptions in global supply chains are weighing on global economic growth and pushing up inflation," the BoC stated. "At the same time, the US administration continues to propose new tariffs and trade policy uncertainty remains elevated."
Canadian GDP fell by 0.1% in Q1. Consumer spending grew 1.4% but government spending declined. "Housing activity also declined and business investment remained weak," the BoC said. "Exports fell while imports rose strongly as inventories were rebuilt."
Employment was up in May, but the BoC noted that "looking through monthly volatility, employment in Canada is little changed since the start of the year." The unemployment rate continues to fluctuate in the 6½%-7% range with the most recent reading at 6.6% in May.
The BoC said Canadian financial conditions have loosened since the April Monetary Policy Report. "Global equity markets have been buoyant and bond yields remain volatile," they stated. "The Canadian dollar has weakened against the US dollar and other currencies."
The BoC said the latest data suggest that growth will resume in the second quarter but the economy is still expected to remain in excess supply.
Inflation Expected to Hover Around 3% Near-Term
The Bank of Canada said "there has been limited evidence of broad-based pass-through of higher energy prices to other consumer prices." However, with global oil prices still roughly $10 a barrel above the April MPR assumptions, "total inflation is expected to hover around 3% in the near term before easing gradually towards 2%."
"Economic activity in Canada has been weak and uncertainty about US trade policy persists," the BoC concluded. "The conflict in the Middle East is ongoing and oil prices remain elevated. Governing Council is continuing to look through the war's near-term impact on headline inflation, but will not let higher energy prices become persistent inflation."
FAQ
What rate did the Bank of Canada maintain on Wednesday?
The Bank of Canada maintained its key overnight rate at 2.25% on Wednesday, with the bank rate staying at 2.50% and the deposit rate remaining at 2.20%.
Why did the Bank of Canada hold rates steady?
The BoC held rates steady due to weak economic activity in Canada, ongoing uncertainty about U.S. trade policy, and elevated oil prices resulting from the Middle East conflict. The central bank stated it will not let higher energy prices become persistent inflation.
What is the Bank of Canada's inflation outlook?
The BoC expects total inflation to hover around 3% in the near term before easing gradually towards 2%, as global oil prices remain roughly $10 a barrel above April Monetary Policy Report assumptions.
