The Bank of Canada has kept its policy rate at 2.75%, which aligns with expectations, especially with a 26% chance of a rate cut. Governor Macklem mentioned there is a general agreement about this decision as clarity on U.S. trade policy is needed. In April, the inflation rate, excluding taxes, was 2.3%, slightly above what was expected. Changes in U.S. tariffs have added uncertainty to trade, affecting Canadian exports and inventory levels. Though spending grew, consumer confidence dropped significantly, and activity in housing slowed down because of lower resale numbers. The economy is expected to show weaker growth in the second quarter, which has prompted caution from the Governing Council.

Careful Monitoring of Risks

The Council emphasized that they are closely watching risks, especially how U.S. tariffs might impact Canadian exports, investment, jobs, and household spending. They are also concerned about future inflation expectations. Macklem’s statements highlighted the bank’s cautious stance, pointing out the instability in U.S. trade policy and a weakening labor market in Canada. The bank plans to keep a close eye on inflation. There is a dovish stance on interest rates, with the possibility of a cut if the economic situation worsens due to U.S. tariffs and uncertainties, as long as inflation remains controlled. After the announcement, the USD/CAD exchange rate remained stable initially. The probability of a rate cut in July fell from 71% to 45%, showing that future expectations are changing based on trade developments. The central bank prioritized stability by keeping its benchmark interest rate at 2.75%. This decision was widely anticipated, although there were some expectations for a minor rate cut. Macklem affirmed that policymakers largely agreed, especially in light of the changing signals from the U.S. Global developments, particularly concerning tariffs and trade uncertainty, have kept officials cautious about making quick changes.

Inflation Figures for April

April’s inflation figures surprised slightly, landing at 2.3% after excluding taxes. This number was a bit higher than forecasts, signaling that price pressures are still present. Concerns over trade, especially due to recent tariff discussions from the U.S., have disrupted export trends and inventory cycles, which is affecting business sentiment. Spending did increase modestly, but this was nearly entirely offset by a fall in consumer sentiment. The housing market, usually a good indicator, has shown signs of cooling mostly due to a decrease in resale activity. Overall, these trends point to a sluggish second quarter ahead. The monetary policy committee used cautious language to convey alertness but not alarm. They specifically mentioned the risks posed by trade on jobs, investments, and household finances. They stressed the importance of monitoring shifts in inflation expectations carefully, especially as real indicators face external pressures. Macklem maintained a measured tone. Weak labor data combined with uncertain policies from abroad justifies a wait-and-see approach. If cost-of-living problems do not worsen, there is room to lower policy rates further if the economy slows down. After the rate decision, expectations for a July cut noticeably dropped, indicating that traders have adjusted their short-term predictions. The change, from 71% to 45% likelihood, suggests a fragile optimism about trade resolutions, which will be reassessed with each new data release and policy update in the coming weeks. We are monitoring volatility in the short end of the yield curve. If labor data does not deteriorate significantly, flattening may pause. Current trading volumes reflect uncertainty rather than strong confidence. The sensitivity of options indicates a focus on trade news rather than domestic economic factors. This environment calls for careful consideration. Adjustments should reflect potential risks linked to external shocks, especially as terminal rate forecasts are becoming more tied to negotiations outside our control. The mispricing in forwards seems increasingly disconnected from local inflation data and more related to broader adjustments. Effective risk management now relies on understanding how quickly expectations can change. Prices are more sensitive to short-term fixes relieving pressure rather than long-term improvements. Market reactions have been more influenced by statements than by any single piece of data. Attention should remain on spreads that feel the pressure from uncertain capital movements. While some carry has compressed, the volatility in sensitive areas has steepened. Markets seem to be responding more gradually to economic data, saving larger movements for policy signals and trade negotiation updates. Adjusting the implied path for rates may not follow traditional indicators. Policymakers seem willing to accept smaller cuts if headline data stabilizes, even if ground-level conditions stay soft. Changes in short-term rates must carefully consider this nuanced signal rather than react impulsively to expected stimulus. Create your live VT Markets account and start trading now.

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