Bank of Canada maintains rate at 2.25%, says they ‘will not let higher energy prices become persistent inflation'

• Canadian GDP fell 0.1% in Q1 with weak business investment and housing activity, though employment rose in May with unemployment at 6.6%
• Total inflation is expected to hover around 3% in the near term before gradually easing toward the 2% target, with oil prices roughly $10 per barrel above April projections
• The Canadian dollar rose briefly after the announcement to 1.3616 per USD (down 0.24%), while gold in CAD terms fell 2.09% to $5,818.09 per ounce

Summary

Key Decision: The Bank of Canada held its overnight rate steady at 2.25% on Wednesday, maintaining the bank rate at 2.50% and deposit rate at 2.20%, in line with market expectations.

Economic Outlook: Canadian economic activity has been weak, with Q1 GDP declining 0.1%. Consumer spending grew 1.4%, but housing activity, business investment, and government spending all declined. Exports fell while imports rose as inventories were rebuilt. The unemployment rate remained in the 6.5%-7% range, registering 6.6% in May. Employment levels have been largely unchanged since year-start, though May showed some gains. The BoC expects growth to resume in Q2 but anticipates the economy will remain in excess supply.

Inflation and Energy: The central bank acknowledged elevated oil prices—approximately $10 per barrel above April projections—driven by the ongoing four-month Middle East conflict. Total inflation is expected to hover around 3% near-term before gradually easing toward the 2% target. Crucially, the BoC stated it has seen "limited evidence of broad-based pass-through of higher energy prices to other consumer prices" but warned it "will not let higher energy prices become persistent inflation."

Trade Policy Concerns: Uncertainty surrounding U.S. trade policy and proposed tariffs continues to weigh on economic prospects.

Market Reaction: The Canadian dollar strengthened initially, with USD/CAD falling 0.24% to 1.3616. Gold (XAU/CAD) declined 2.09% to $5,818.09 per ounce. Canadian financial conditions have loosened since April, with buoyant equity markets, volatile bond yields, and a weakening Canadian dollar.