This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on June 4, 2025.
This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations.
Governing Council’s policy decision-making meetings began on May 30, 2025. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent, Rhys Mendes and Michelle Alexopoulos.
International economy
Governing Council members began their deliberations by discussing global economic developments since the April Monetary Policy Report. The United States continued to add and roll back tariffs on many of its trading partners. Nevertheless, the risk of a prolonged global trade war with very high tariffs had diminished since the April policy decision. The trade war between the United States and China had cooled off—tariff rates had been lowered substantially but not removed—and the US administration was negotiating trade deals with many countries. Despite this de-escalation, members agreed that US tariffs had increased substantially since the start of the year, US trade policy remained unpredictable, and uncertainty was high.
Members acknowledged that the global economy remained resilient despite the significant uncertainty posed by tariffs. In the United States, domestic demand remained robust, growing at about 2.5% in the first quarter. Consumer spending grew modestly in the first quarter. Data on personal consumption expenditures through April suggested consumption would strengthen in the second quarter, despite historically low levels of consumer sentiment. The solid labour market was supporting income and spending. Inflation in the United States had been easing gradually, in line with expectations, but the impact of tariffs had only begun to appear in the data.
The euro area economy was strong in the first quarter as exports were brought forward to get ahead of US tariffs, which boosted manufacturing. Defence spending in the euro area was set to increase, which was expected to support growth. In China, economic growth slowed. The stimulative effect of fiscal policy measures had begun to wane in the first quarter. Chinese exports to several trading partners remained robust even as exports to the United States weakened.
Members noted that financial conditions were similar to the conditions seen at the beginning of the year, although the Canadian dollar had appreciated by about 4%, largely reflecting broad weakness in the US dollar. The turmoil experienced by markets in April was severe but short-lived. While financial markets remained sensitive to US policy announcements, volatility had become less pronounced as the severity of US tariffs had been scaled back from their early April peaks, and market assessments of the probability of a recession had diminished. Equity markets in North America and Europe dropped by as much as 20% in April but had since regained much of their value. Similarly, credit spreads were also back to January levels after widening in April. Global oil prices fluctuated in the past few months but were close to their April levels.
Canadian economy and inflation outlook
Members then turned their attention to recent economic developments in Canada. Economic growth in the first quarter was slightly stronger than anticipated, with the composition of growth largely as expected. Exports and inventory accumulation both contributed strongly to growth as businesses sought to get ahead of the tariffs. Consumer spending and business investment had also contributed to growth, even in the face of considerable angst about US trade policy. Housing activity and government spending had declined.
While final domestic demand was flat, consumption grew by 1.2% in the first quarter. Retail trade data for March suggested that household spending had been holding up, even as consumer confidence had fallen. Members were encouraged by the strength in business investment growth in the first quarter, but they acknowledged that it was likely temporary. Spending on machinery and equipment grew by more than 20%, perhaps indicating that businesses had advanced purchases before costs increased from tariffs. Residential investment declined markedly. Members agreed that elevated uncertainty may have been weighing on home sales and lower immigration may have contributed to slower demand growth. Members noted that weakness in housing activity was concentrated in the Toronto and Vancouver areas, and they expected some support going forward from new housing policies.
Governing Council members expressed concerns about the softer labour market. Employment growth had slowed in April, with private sector employment down. The job separation rate increased, and the unemployment rate rose to 6.9%. Job markets in trade-related sectors such as manufacturing were particularly weak. Data from the April Labour Force Survey did not indicate that the deterioration of labour market conditions in these sectors had spread to other sectors of the economy. But this weakness had not been offset by strength in other sectors. Businesses also reported a slowdown in hiring intentions. Most measures indicated that wage growth continued to ease.
Overall, members agreed that the economy showed more resilience than expected. Members expected the boost in export growth to dissipate quickly as tariffs and uncertainty continued, and because the pull-forward of exports had borrowed strength from the future. With domestic demand likely subdued, they expected the second quarter to be much weaker.
Members spent considerable time discussing recent inflation data. Consumer price index (CPI) inflation declined to 1.7% in April. The elimination of the consumer carbon tax reduced the overall inflation rate by 0.6 percentage points. Excluding taxes, inflation was 2.3%, which was slightly above expectations.
Inflation in goods excluding energy continued to rise but remained close to its historical average. Food prices rose by 3.8% in April, reflecting higher costs. Members agreed that cost increases from trade disruptions may be playing a role in inflation in goods prices, but the direct impact from retaliatory tariffs was not yet evident. They acknowledged that the pass-through of higher input costs to consumer prices would be difficult to track going forward. Some members expressed concern about the increase in the breadth of CPI components growing above 3% in recent months, particularly for services. Others noted that some of the recent price growth in services could be due to one-time price increases that happened during this time. Inflation in shelter services continued to ease but still contributed significantly to overall inflation.
The Bank’s preferred measures of core inflation increased as well and were above 3%. Other measures of underlying inflation also rose, although the levels varied. Governing Council members discussed whether underlying inflationary pressures reflected the past depreciation of the Canadian dollar; the cost effects of trade disruptions as businesses adjust supply chains; the changing consumer behaviours, such as an increased preference for buying Canadian products; the timing of annual price increases for some administrative services; or a combination of these factors. Members noted that measures of underlying inflation had come in higher than they expected since the beginning of the year. They agreed they would need to watch developments in inflation across CPI components carefully to gauge how inflationary pressures are evolving.
Near-term inflation expectations had risen in the first quarter, and results from recent surveys continued to suggest consumers expect prices to rise because of tariffs. Survey evidence and insights from regional outreach showed that businesses also anticipated an increase in costs from tariffs and from efforts to reorganize supply chains and pursue new markets for their goods. Many reported that they would be passing on these extra costs to their customers in the form of higher prices.
While economic activity was showing some resilience in the face of trade uncertainty, members recognized that a period of weaker economic growth lay ahead. At the same time, they noted that inflation was somewhat stronger than expected. The increase in core inflation may suggest underlying inflation was firmer than they had previously thought. They agreed they would need to continue to carefully assess the timing and strength of both the downward pressure on inflation from a weaker economy and the upward pressure on inflation from higher costs.
Considerations for monetary policy
Governing Council members discussed the risks and uncertainties facing the Canadian economy as they weighed the current stance and path of monetary policy. As they did at the previous meeting, members found it useful to distinguish between two layers of uncertainty: uncertainty about the path for US trade policy and uncertainty about the impacts of tariffs.
The primary source of uncertainty—and the biggest threat facing the Canadian economy—was the trade conflict initiated by the United States. Members assessed how this risk had evolved since the April Report. While they had a range of views on how US trade policy could evolve, they agreed that the likelihood of a protracted and severe global trade war had diminished. There was some cautious optimism that ongoing trade negotiations between the United States and many of its trading partners could reduce uncertainty and result in less damage to the global economy. However, they recognized that US trade policy remained unpredictable. This was underscored by President Trump’s announcement during deliberations that he would double tariffs to 50% on steel and aluminum exports to the United States.
Members also shared a range of views on how the economy would respond to the trade conflict. They reviewed the information they had on the four key indicators they were watching to assess the impact of tariffs.
- How much higher tariffs reduce demand for Canadian exports: Growth in exports was robust in the first quarter because US businesses made purchases in advance of expected cost increases from tariffs. This surge in exports was expected to fade quickly, but more data were needed to determine the extent and persistence of the slowdown.
- How much lower demand for exports spills over into business investment, employment and household spending: To date, the impact appeared to be concentrated in trade-related sectors, particularly the motor vehicle sector, where layoffs have been announced. Business investment and consumer spending showed some resilience in the first quarter, but they were likely to be subdued in the second quarter. An expected increase in government spending following a decline in the first quarter could partially offset the negative contributions to growth from exports.
- How much and how quickly cost increases are passed on to consumer prices: Businesses reported increased costs related to managing their supply chains, including finding new suppliers and developing new markets. This may have been contributing to the increase in inflation for goods prices. But it was still too early to gauge the speed and extent of the direct pass-through from Canadian countermeasures to consumer prices.
- How inflation expectations evolve: Short-term inflation expectations of consumers and businesses had risen since the beginning of the year. However, long-term expectations remained anchored.
Governing Council spent some time evaluating the extent of potential downward pressures on inflation from weaker demand and the extent of upward pressures on inflation primarily arising from cost increases because of the trade conflict.
Members noted that measures of underlying inflation reflected easing but still-elevated inflation in shelter services. Easing mortgage interest costs should provide further downward momentum. With growth expected to slow and unemployment expected to rise, further slack in the economy would open up and put downward pressure on inflation.
At the same time, members noted that underlying inflationary pressures could persist for an extended period as consumers and businesses adapt to the rewiring of global trade. The direct impact of tariffs would only begin to show up in consumer prices in the coming months. Businesses have been reporting that they would pass on higher costs stemming from trade disruptions to prices and could use tariffs as a justification for doing so. And while total inflation dropped because the carbon tax was removed, the tax effect would fall away after a year while the pass through from tariffs could persist. These factors could lead to persistent upward pressure on inflation.
Members agreed that these dynamics were complex and could evolve in several ways. They would need to proceed carefully as they gain more information.
Policy decision
Members discussed the appropriate stance for monetary policy at this time, given the risks and uncertainties affecting the economy and inflation. They discussed two options: maintaining the policy interest rate at 2.75% or reducing it by 25 basis points.
Three developments were particularly salient in Governing Council’s deliberations. First, uncertainty remained very high. Second, the Canadian economy was softer but not sharply weaker. Final domestic demand was flat in the first quarter after growing robustly in the previous quarter. Yet overall GDP growth held up thanks to the pull-forward of exports and some resilience in consumption and business investment. Third, there was some unexpected firmness in recent inflation data. Measures of underlying inflation had ticked up, but it was not clear whether this reflected volatility in inflation or persistent cost pressures. Members acknowledged that underlying inflation could be firmer than they had expected.
Principally reflecting these considerations, Governing Council decided to maintain the policy interest rate at 2.75%, as they continued to gain more information about US trade policy and its impacts on the Canadian economy.
Governing Council members also discussed the future path for interest rates. They agreed that heightened policy uncertainty would likely continue to weigh on economic activity in Canada. How much economic activity slows would depend on the evolution of US trade policy, the response of businesses and governments, and how this all weighs on household confidence, the labour market and consumption. There was some diversity of views on the most likely path ahead. The weaker the economy and the more downward pressure on inflation, the more there would be a need to lower the policy interest rate further. However, if the recent firmness in underlying inflation were to persist, it would be more difficult to cut the policy rate. Overall, members agreed there could be a need for a further reduction in the policy interest rate if the effects of US tariffs and uncertainty continued to spread through the economy and cost pressures on inflation were contained.
Governing Council agreed to continue to assess the opposing pressures on inflation from weaker demand and higher costs. In doing so, they would pay particular attention to the four indicators noted above. Members agreed that, in the face of tariffs, monetary policy should support the economy while maintaining its primary focus on price stability.
Finally, in light of the considerable uncertainty about trade policy and its impact on the Canadian economy and inflation, Governing Council members agreed to reiterate in their communications that they would proceed carefully by being less forward looking than usual, with particular attention to the risks.