Insights 
VT 
The Bank of Canada maintained its policy rate at 2.75%, meeting expectations, given a 26% chance of a rate cut. Governor Macklem cited a consensus for this decision as clarity on U.S. trade policy is sought.
April inflation, excluding taxes, was 2.3%, slightly above expectations. U.S. tariff changes have contributed to trade uncertainty, impacting Canadian exports and inventories. While consumption grew, consumer confidence fell sharply, and housing activity saw a reduction due to diminished resales. The economy is expected to show weakened growth in the second quarter, warranting caution from the Governing Council.
Careful Observation Of Risks
The Council stressed careful observation of risks, particularly how U.S. tariffs could affect Canadian exports, investment, employment, and household spending. Concerns also focus on future inflation expectations.
Macklem’s remarks reflected the bank’s cautious approach, noting U.S. trade policy volatility and a weakening Canadian labour market. The bank will monitor inflation closely. A dovish hold on rates is evident, with potential for a rate cut if the economic situation worsens due to U.S. tariffs and uncertainties, assuming inflation stays in check.
Post-announcement, the USD/CAD exchange rate was initially stable, with July cut pricing dropping from 71% to 45%, indicating changing future expectations based on trade developments.
The central bank chose stability over action, keeping its benchmark interest rate unchanged at 2.75%. This decision had already been mostly anticipated, though there was some positioning for a minor rate reduction. Macklem confirmed that there was broad agreement among policymakers, particularly in the face of shifting policy signals from the U.S. Global-level developments, especially surrounding tariffs and cross-border trade uncertainty, have kept officials on the defensive, wary of moving too rapidly.
Inflation Figures For April
Inflation figures for April delivered a mild surprise, printing at 2.3% when taxes are stripped out. This marginally exceeded forecasts, reminding markets that price pressures haven’t fully retreated. Trade concerns, triggered by fresh tariff discussions from the southern neighbour, have unsettled export trajectories and disrupted inventory cycles. That, in turn, has filtered into business sentiment.
Spending levels managed to rise modestly, but nearly all that momentum was offset by a slide in consumer sentiment. The housing market, usually a reliable indicator, has shown signs of cooling, largely due to reduced resale levels. Taken together, these sub-components point to a likely sluggish second quarter.
The monetary policy committee chose language designed to reflect alertness, though not alarm. It specifically highlighted exposure to trade effects on jobs, investments, and household finances. Strong emphasis was put on the potential for expectations around inflation to shift—these are being carefully tracked, especially as real indicators battle against external stress.
Macklem’s tone remained deliberately measured. Weak labour data, paired with policy ambiguity from abroad, strengthens the justification for patience. As long as cost-of-living pressures don’t re-accelerate, there’s room to revise policy downward if the slowdown worsens.
Following the rate decision, betting on a rate cut in July dropped notably, implying traders have recalibrated their short-term projections. The shift, from a 71% to a 45% probability, suggests optimism on resolution remains fragile and will be reassessed with every data release and policy comment in coming weeks.
We are watching volatility at the short end of the curve. Term structure flattening may pause unless labour data materially deteriorates. Volumes suggest uncertainty rather than strong conviction. Option skew continues to reflect sensitivity to incoming trade headlines rather than domestic macro factors.
This environment is not one for directional complacency. Adjustments should reflect asymmetric risks around external shocks, particularly with terminal rate forecasts increasingly tied to negotiations beyond our control. Mispricing in forwards now appears less tied to domestic inflation data and more to broad-map recalibration.
Risk management now depends on understanding how fast expectations can swing. Pricing is more sensitive to short-term fixes easing pressure than to structural improvements. Reactions have remained tethered to statement language more than any single data release.
Focus should stay on spreads that remain stretched under the weight of uncertain capital flows. Some of the carry has compressed, and the volatility smile is steeper in areas sensitive to bilateral trade fallout. We see markets responding with less immediacy to marginal economic data, reserving larger moves for policy signals and trade negotiation headlines.
Adjustments in the implied path for rates may not follow conventional cues. Policymakers appear willing to tolerate shallower cuts if headline data stabilises, even as conditions on the ground stay soft. Moves in front-end rates must weigh this subtle but reliable signal against the temptation to jump on anticipated stimulus.
