May 22, 2025
Money market traders have scaled back their bets that the Bank of Canada will cut the overnight rate at its next policy meeting June 4 following hotter-than-expected inflation data this morning.
Canada’s annual inflation rate in April fell to 1.7% from 2.3% in March as overall energy prices plunged 12.7% after the removal of the federal consumer carbon tax, Statistics Canada said. Analysts had forecast the annual rate would dip to 1.6%. On a month-by-month basis, inflation dipped by 0.1% compared to analysts’ forecasts of a 0.2% drop.
Two of the three core measures of inflation hit 13-month highs on underlying price pressures. CPI median, which shows the median inflation rate across CPI components, rose from 2.8% in March to 3.2% in April. CPI trim, which excludes upside and downside outliers, edged up from 2.9% to 3.1%.
The data are the penultimate major release before Bank of Canada’s next fixed rate announcement date on June 4. Statscan is due to release first quarter GDP figures on May 30. After seven consecutive cuts since last June the bank held rates on April 16 while saying it would be ready to move decisively if needed to keep inflation under control.
Today’s report clearly has taken market participants by surprise. The Canadian dollar immediately rose about one-tenth of a cent on the data, to above 71.80 US cents. There was an even sharper reaction in the bond market, with Canada’s two-year bond yield – which is particularly sensitive to central bank policy – shooting up nearly 10 basis points to 2.63%. The U.S. two-year yield, by comparison, was flat.
Here’s how implied probabilities of future interest rate moves stood in swaps markets moments after the 830 am ET data, according to LSEG data. The overnight rate now resides at 2.75 per cent. While the bank moves in quarter-point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
Overall, market-implied probabilities of a June 4 rate cut have now fallen to below 50%, although traders still expect one to two more cuts before the end of this year.
Here’s what they looked like minutes before the inflation report:
Here’s how economists and market strategists are reacting in written commentaries:
Thomas Ryan, North America economist, Capital Economics
This shows underlying inflation pressures still pose a threat but, with growing signs that US tariffs are putting strain on the economy – most notably in manufacturing and housing – we do not think this will be enough to dissuade the Bank of Canada from cutting interest rates in June. … While this level of underlying inflation is still too high for the Bank of Canada’s comfort, the Bank’s mostly dovish tone in April suggests it is more focused on economic risks, which supports our view that it will cut rates again in June following the recent set of weaker economic data.
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
The Bank of Canada typically looks through level shifts in prices like the one driven by the removal of the carbon tax and officials will clearly be concerned with the recent acceleration in core measures of inflation.That said, given that the removal of the federal carbon price will also likely impact inflation expectations, there’s scope for the change to further affect price dynamics in a positive way. The change in policy has heavily impacted the prices of goods, such as gasoline, that tend to form the basis of inflation expectations. As a result, we expect that upcoming surveys will show a sharp reversal of the spike in inflation expectations seen earlier this year. Policymakers should have an early internal indication of inflation expectations by the time of their next scheduled rate decision. With the economy clearly weakening in recent months, lower inflation expectations should keep central bankers on track to cut rates 25 basis points in June. We recently revised our terminal rate forecast to 2.00%, up from 1.75%, and today’s slightly hotter data reinforce that decision, but the data don’t remove the need for monetary stimulus in the near-term.
Veronica Clark, economist, Citi
Looking through tax impacts, details of April CPI were somewhat stronger, with larger than expected increases in rents, cars, and furniture prices. Core inflation measures above the target range increase the chance of rates remaining on hold in June. But BoC officials have been dismissive of recent strength in core inflation, which has almost entirely reflected stickiness in the measurement of shelter inflation. Housing activity has been weak recently and should lead to much softer shelter inflation in the second half of the year. While a cut in June is now a close call and will likely depend on details of Q1 GDP data next week, we continue to expect 100bp more of cuts from the BoC this year.
Derek Holt, vice-president, Scotiabank Economics
There is no way that the BoC should be cutting any time soon, if at all. Despite modest slack, other forces are keeping core inflation at sticky, elevated levels even before trade war effects bite through supply chain effects.
At 3.15% y/y, the average of the TM [trimmed mean] and WM [weighted median core] measures is tracking a little warmer than either of the BoC’s two scenarios had anticipated for Q2 when they crafted their projections in the April MPR. At that time, they said that under Scenario 1, core CPI would be 2.9% in Q2 and under Scenario 2 it would be 3%. Today’s readings for April are higher than both, though obviously there is more data to come in Q2. Still, Macklem has emphasized data dependency and getting early tracking that is hotter than forecast will keep him on guard toward inflation risks.
Inflation expectations across multiple measures remain too high in Canada. They are not great, soft data measures, but the BoC pays attention to them.
At 2.75%, the BoC is at or below its estimate of the neutral policy rate (2.25% to 3.25%). That gives the central bank more optionality into trade wars; or it cut too far which remains my bias in the face of sticky underlying inflation. That is very different from many other global central banks that remain meaningfully above neutral (Fed, ECB, BoE, RBA etc). Furthermore, the BoC ended QT long before other central banks.
Also note that wage growth remains explosive in contract settlements. … Fiscal policy easing as a substitute for monetary easing also lies ahead starting with nearer term measures like the planned tax cut on Canada Day. Fast forward to a Budget sometime in Fall and dollops of further stimulus are coming.
And the Canadian dollar remains undervalued as a reflection of the issues facing the currency.
Douglas Porter, chief economist, BMO Capital Markets
The big relief from lower gasoline prices in April masked an unfriendly inflation picture beneath the surface. Some of that upswing in underlying prices appears related to the simmering trade war, with food and vehicle prices showing some real power. In other words, there are two conflicting special factors at play here, both of which should fade over time. This leaves the Bank of Canada in a spot, as their two main measures of core are now running at their fastest pace in a year—i.e., back before they began cutting rates. After a weak jobs report handed the Bank a good reason to cut, this back-up in core above 3% pretty much washes that away. Given a weak growth outlook for much of 2025, we continue to expect further rate reductions, but the Bank may need more time to gain comfort in the inflation outlook.
Nathan Janzen and Abbey Xu, economists with Royal Bank of Canada
Our own base case expectation has been that a softening economic growth backdrop will ultimately push the BoC to cut the overnight rate down to 2.25% in the summer (from 2.75% currently) after skipping a reduction in April. But the central bank will need to balance that pessimistic growth outlook with inflation pressures — and the latest upside inflation surprise means it could well now take downside economic growth surprises to justify further cuts. … While growth in broader inflation metrics in April was concerning, one positive is that the increase does not appear to have been overly broadly based. Roughly 48% of the CPI basket experienced inflation rates above 3% (on a three-month annualized basis), actually down slightly from 51% in March and approximately 40% two quarters earlier.
Jules Boudreau, senior economist, Mackenzie Investments
So, is the April print a positive or a negative surprise for the BoC? Should we exclude or not the effect of the carbon tax removal? In our view, the BoC will treat this print as neutral, given the ambiguity. If Macklem and co. were planning to cut, this won’t change their mind.
We predict a July cut for the Bank of Canada. But the Governing Council is likely keeping all options open. Clearly, economic growth has started to weaken again after firming up at the end of 2024. Tariffs will have only a marginal direct impact on Canadian inflation. Furniture, a particularly tariff-impacted category of goods, did see its price accelerate in April. But overall, the risk of a tariff-driven inflation surge is very low. The big risk for the BoC is fiscal. Higher federal government spending will boost growth and inflation in Canada. And with the federal government deciding not to publish a budget this spring, the Bank of Canada won’t want to get aggressive with rate cuts before it gets clarity on deficits.
Bryan Yu, chief economist, Central 1 Credit Union
Elevated core inflation underscores the challenges facing the Bank in setting the policy rate going forward. The economy is clearly slowing under the weight of the trade war as seen in a weakening labour market, but the trade war could/is adding to consumer price pressures through higher production costs and import prices via Canadian retaliatory tariffs. This will continue to be a balancing act of supporting the economy while maintaining the target rate of inflation. We expect the Bank to cut in June, with low headline inflation providing justification, and three cuts this year due to further economic weakness. However, firm core inflation suggests a pause in between rate cuts to assess inflation pressures.
Tu Nguyen, economist with national assurance, tax and consultancy firm RSM Canada
For now, price increases associated with tariffs seem to have been kept at bay. Looking ahead, the removal of consumer carbon pricing will continue to apply downward pressure on yearly inflation numbers in the summer, partially offsetting tariff effects. Nevertheless, inflation will not continue to decrease on a monthly basis since the removal of the consumer portion of carbon pricing will only result in a one-time price drop.
The other major factor that applied downward momentum to inflation is shelter. Slowing demand due to stricter immigration policies have led shelter inflation to slide to 3.4%, the lowest since 2021. Shelter prices are expected to remain cool in the next few months as interest rates stay low and the housing market becomes more balanced.
While April’s job report displays warning signs of a weakening economy because of trade uncertainty, the disinflation seen in April’s consumer price data increases the odds of a rate hold by the Bank of Canada in June.
Andrew Hencic, director and senior economist, TD Economics
Today’s inflation print is a setback for the BoC and complicates the picture for the path of monetary policy. However, with the government of Canada offering a temporary reprieve on some tariffs, and the labour market slowing rapidly, we believe the central bank will have enough space to deliver two more cuts this year – adding a bit more support to an economy quickly losing momentum.
David Rosenberg, founder of Rosenberg Research
While the removal of the carbon tax allowed for a seasonally-adjusted -0.2% MoM print on the headline (lower gasoline prices, too), it was disappointing to see the core ex-food & energy index jump more than +0.3% MoM, which it has done in four of the past five months. This places the BoC in a bit of a box. Not to mention the +0.4% MoM spike in the key CPIX measure (excludes the eight most volatile components as well as indirect taxes), which was the sharpest increase since April 2023.
David-Alexandre Brassard, Chartered Professional Accountants of Canada chief economist
This is not a victory lap moment. When you exclude energy, inflation is actually close to 3%, its highest in a year. What we’re seeing in April is largely a policy-driven dip, not a fundamental inflation correction. … This inflation reading isn’t the green light the central bank needs to move on rates just yet. It will need more evidence of economic strain before stepping off the sidelines and cutting rates again.
Andrew Grantham, senior economist, CIBC Capital Markets
Headline inflation suddenly looks less taxing for the Bank of Canada, due to the elimination of the consumer carbon tax and the downward impact of that on gasoline prices, but some core measures remain a concern. … Signs of renewed weakening in the economy on one hand, as shown by the latest employment data, but stronger core inflation on the other makes for a tough decision for the Bank of Canada at its early June meeting.
Nick Rees, head of macro research, Monex Canada, a foreign exchange firm
Food costs climbed from 3.2% to 3.8% YoY in April, adding 0.63% to the headline annual price growth figure, while shelter contributed an additional 0.98%. Admittedly, the latter figure represents a fall when compared to March numbers, with shelter costs decreasing MoM for the first time since August 2022. But crucially, this also indicates that price pressures are increasingly contained in non-energy, non-shelter components of the CPI basket, which will raise fears around tariff pass-through. We think more evidence is needed to make a definitive judgment on this point, but the overall picture does leave risks tilted more in favour of the idea that US tariffs could push up Canadian inflation.
Indeed, as we warned ahead of today’s release, there would be significant focus on any sign of US tariff impacts, given the connectedness of the Canadian economy with its US counterpart. This, in turn, means that today’s release has implications not just for the loonie, but also the greenback. So, while the April data has seen BoC rate cut expectations trimmed, with USDCAD notching modest gains, any downside for the pair should be limited by corresponding appreciation for the dollar. After all, if it is true that US tariffs are pushing up prices in Canada, it is highly likely that a similar effect will play out for the US too. This is likely to prevent significant moves for USDCAD in the short term, but leaves risks for both the dollar and the loonie skewed to the upside versus other G10 currencies.
