Bank of Canada Holds Interest Rate at 2.75% Amid U.S. Trade War Challenges in 2025

The Bank of Canada has decided to maintain its benchmark interest rate at 2.75% as of June 4, 2025, marking the second consecutive pause amid escalating trade war tensions with the United States. This decision reflects the central bank’s cautious stance as it navigates economic uncertainty driven by U.S. tariffs, rising joblessness, and potential inflationary pressures.
Trade War Tensions Shape Monetary Policy
Governor Tiff Macklem announced the decision, emphasizing the need for price stability in the face of unpredictable U.S. trade policies. The trade war, intensified by U.S. President Donald Trump’s recent move to double steel and aluminum tariffs to 50%, has already impacted Canadian businesses, with companies like Dollar Tree reporting profit declines due to higher costs. The OECD has also downgraded global growth forecasts, citing the trade conflict as a major drag on economic momentum.
Macklem noted that while Canada’s economy showed resilience with stronger-than-expected Q1 2025 GDP growth, driven by businesses stockpiling goods to preempt tariff hikes, other indicators are concerning. The unemployment rate rose to 6.9% in April, with trade-sensitive sectors like manufacturing bearing the brunt of job losses. Consumer spending has also weakened, raising fears of a potential recession if trade disputes persist.
Inflation, Growth, and the Path Forward
Inflation cooled to 1.7% in April, largely due to the removal of the consumer carbon tax, but underlying pressures remain. The Bank of Canada is wary of tariff-driven price increases, which could push inflation above its 2% target. Macklem hinted at the possibility of rate cuts later in 2025 if economic conditions deteriorate further, stating, “We’re prepared to act decisively if the data points clearly in one direction.”
Economists are divided on the Bank’s next steps. Some, like TD Bank’s Andrew Hencic, predict two additional rate cuts in 2025, potentially bringing the rate to 2.25% by year-end, if the trade war’s impact deepens. Others, citing posts on X, note that markets priced in a 78% chance of a rate pause for this meeting, reflecting mixed signals from elevated core inflation and GDP surprises.
Economic Risks and Global Impact
The trade war’s effects are far-reaching. Reuters reports that Trump’s tariffs have cost companies over $34 billion in lost sales and higher costs, with retailers like Walmart warning of price hikes for consumers. In Canada, the Bank of Canada highlighted the risk of rising mortgage arrears if the trade conflict prolongs, a scenario not seen since the 2008-09 financial crisis. Despite these challenges, the central bank noted that household debt has decreased, and financial institutions are better equipped to handle economic shocks.
Globally, the trade war has weakened economic outlooks, with the U.S. showing signs of slowing growth and the euro area experiencing modest expansion. The Bank of Canada remains focused on balancing inflation control with economic support, but as Macklem stated, “Monetary policy cannot resolve trade uncertainty.”
What’s Next for Canada’s Economy?
The Bank of Canada’s next interest rate announcement is scheduled for July 30, 2025, alongside the release of its Monetary Policy Report. Until then, policymakers will closely monitor inflation trends, labor market data, and the evolving trade landscape. For now, the steady 2.75% rate offers a moment of stability, but with global trade tensions showing no signs of easing, Canada’s economic future remains uncertain.
Keywords: Bank of Canada, Interest Rate 2025, Trade War, U.S. Tariffs, Tiff Macklem, Canadian Economy, Inflation, Unemployment, Monetary Policy, Recession Risk, GDP Growth, Steel Tariffs, Economic Uncertainty, Mortgage Arrears, Price Stability
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