The Bank of Canada (BoC) has decided to maintain its key policy rate at 2.75%, a cautious move despite stronger-than-expected economic growth in the first quarter of 2025. This decision follows a series of rate cuts that began in June 2024, which were aimed at supporting the economy amid weak domestic demand. Although Canada’s GDP grew by 2.2% in Q1, largely driven by exports, consumer spending and business investment remain sluggish, hinting at possible challenges ahead.
Economists predict that the BoC will likely reduce rates further, with at least two additional cuts expected before the end of the year. Since June 2024, the central bank has already reduced rates by 225 basis points, reflecting concerns over economic slowdown and low inflation. Despite the resilience in GDP figures and core inflation inching closer to the BoC’s upper target of 3%, the bank is expected to pause any further cuts for now, awaiting new economic forecasts in July. Some projections even suggest that Canada may experience an economic contraction in the coming quarters, potentially leading to a recession.
The Canadian dollar (loonie) has been responding to these rate decisions with fluctuations, especially as the GDP growth exceeded expectations. On May 30, the loonie appreciated against the U.S. dollar, trading at 1.3750 per U.S. dollar. However, the currency has faced downward pressure due to ongoing global trade uncertainties and the broader economic environment.
Looking ahead, the Bank of Canada will continue to balance its growth and inflation targets carefully, while monitoring the broader international economic landscape and the impact of global trade tensions. The decisions made in the coming months will be crucial in shaping Canada’s fiscal trajectory.
