Introduction to Interest Rates
The central bank has decided to keep its overnight loan rate at 2.75%. This rate is crucial because it’s used by lenders to determine their prime interest rate, which in turn affects variable mortgage interest rates.
Background on Interest Rate Changes
This decision marks the second time the Bank of Canada (BOC) has held its rate steady after a pause on April 16. Prior to this, the BOC had been consistently lowering the rate over seven installments between June 2024 and March 2025, resulting in a total reduction of 225 basis points from 5% to 2.75%. As a result, the main rate used by Canadian lenders remains unchanged at 4.95%.
Mood around the Interest Decision
The latest BOC rate hold was largely expected by economists, but the decision was challenging due to tariffs affecting the economic outlook and mixed signals from data used in interest decisions.
Economic Indicators
The recent April Inflation Report showed a promising 1.7% inflation rate. However, core measures of inflation, such as the average measure of the CPI core, rose to over 3%. This indicates that higher consumer prices are anchored due to tariffs, which is concerning for the BOC. On the other hand, the Canadian economy is showing signs of weakness, with the latest quarterly gross domestic product (GDP) report indicating a 2.2% increase in exports, stronger than expected, as companies built up inventory.
Bank of Canada’s Perspective
According to the BOC’s press release on the interest rate decision, "In Canada, economic growth in the first quarter was 2.2%, somewhat stronger than the bank forecast, while the composition of GDP growth was largely as expected." The release also stated, "The pull forward of exports to the United States and the accumulation of existence increased the activity, whereby the final domestic demand is approximately flat." Furthermore, the bank expects the economy to be "significantly weaker in the second quarter, since exports and inventory and the final domestic demand remain."
Conclusion
Overall, the Bank of Canada’s decision to hold the interest rate steady suggests that the bank is cautious about providing more stimulus to the economy and prefers to keep its rate cuts in reserve until there are further signs of economic stress. This approach indicates a careful balancing act between managing inflation and supporting economic growth, reflecting the complex and changing economic landscape.