During its June 4 meeting, the Bank of Canada decided to keep interest rates steady at 2.75%. Right now, there is a 20% chance of a rate cut by July 30, and it’s expected that there won’t be a full rate cut before the year ends. Canadian and US officials set a 30-day deadline to finalize a trade deal, which could influence the central bank’s future decisions. The meeting highlighted that export growth may slow due to tariffs and other uncertainties. Ongoing inflation pressures might continue as consumers and businesses adjust to changes in global trade. It’s tricky to see how rising input costs are passed on to consumers. The Bank’s council stressed the need to keep an eye on inflation across the consumer price index’s different components. Although a major global trade war seems unlikely, short-term inflation expectations have increased. While first-quarter business investment showed promise, its long-term sustainability is unclear. If tariffs and uncertainties persist but cost pressures remain manageable, interest rates might need to drop further. In summary, there are no clear signals from this meeting that would dramatically alter the Bank of Canada’s current interest rate expectations. The Bank of Canada’s choice to keep its policy rate at 2.75% shows a general caution among central banks. They are watching inflation settle into new patterns amid unpredictable trade changes. While there were no adjustments this time, market expectations have already shifted, lowering the chance of a rate cut by the end of July to about 20%. More significantly, markets now anticipate less than one cut before December, reflecting concerns over changing inflation trends and external pressures. A new 30-day trade target between Canada and the US adds more tension. Any trade deal—or lack of one—could influence the central bank’s ability to adjust rates. For now, policymakers seem to be cautious. Ongoing trade friction could further strain export growth, tighten margins, and increase prices along already stretched supply chains. Policymakers expressed concern about accurately capturing the business cost increases that are passed to households. This detail is important because rising costs don’t always contribute to overall inflation at the same rate. Instead, they come in uneven waves, with some prices rising quickly while others take their time. While a full-scale trade war seems unlikely, short-term inflation expectations have risen, indicating that market participants are increasingly concerned. Early signs of momentum in business investment—what governments often hope will support long-term growth—came with warnings. Many indicators suggest that this momentum might not last if trade instability continues. From our perspective, if tariffs increase but companies can manage costs without heavy price hikes, central banks may have some room to lower rates. However, there’s a limit. Too strong a reaction from companies—like job cuts or significant price increases—could lead monetary policymakers to pause. Comments from the June meeting did not suggest a change in strategy. Instead, the tone indicated a steady approach, with readiness to adapt if clearer evidence emerges. For derivative strategies, the upcoming data releases—particularly regarding inflation components and future investment intentions—are crucial. With limited room for immediate changes, positioning should reflect the decreasing chances of rate cuts and tighter interactions with fiscal policy. The growing focus on data dependency emerged in council comments and is unlikely to change unless significant components—like domestic inflation or external trade flows—shift notably. For now, careful monitoring is essential, and any biases should align closely with reliable data, especially leading up to the next scheduled policy announcement.

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