Surprising no one, the Bank of Canada left its policy settings on hold this morning, while warning that it faces a ‘dilemma’ in responding to the risks bearing down on the economy. Higher energy prices could feed a rise in generalised price pressures, but trade uncertainty remains a major headwind and the economy is expected to maintain considerable slack—limiting upside inflation risks for now.

Officials led by Governor Tiff Macklem held the policy rate at 2.25% for a fifth consecutive meeting, having delivered nine cuts between June 2024 and September 2025.

In remarks prepared for the post-decision press conference, Macklem laid out the quandary: raising rates to tame inflation risks deepening the downturn, while easing to support growth risks entrenching higher prices. Holding steady, he said, balances those competing pressures—for now. Critically, he repeated a warning that officials could be forced to deliver consecutive rate increases if inflation pressures spread beyond energy, language that rattled markets after the April decision and prompted traders to price in a more aggressive tightening path.

The statement acknowledged a mixed economic backdrop. Growth unexpectedly remained negative in the first quarter, contracting at an annualised pace of 0.1% as weak business investment, softening exports and restrained government spending offset solid consumption. Headline prices rose more slowly than forecast in April while the core measures targeted by the Bank softened, pointing to weakness in underlying demand. But the economy added a surprising 88,000 jobs in May—far exceeding expectations of 10,000 and recouping most of the 112,000 positions lost earlier in the year—while the unemployment rate dropped to 6.6% from 6.9%. Officials said they expected growth to resume in the second quarter but noted that, even with a rebound, the economy would remain in excess supply—a clear signal that the Bank sees more slack to absorb before tightening becomes necessary.

The Canadian dollar is paring an advance that began after this morning’s US inflation report met expectations, suggesting some traders were positioned for a more hawkish tone. We suspect rate differentials could tilt further against the currency in the coming months as investors scale back bets on a Bank of Canada hike by year-end. But that may matter less than it once would have: the loonie’s correlation with broader risk appetite is currently far stronger than its sensitivity to rates, implying that shifts in US equity valuations and the evolving situation in the Middle East are likely to play a larger role.