Canada’s economy showed decent strength in the first quarter of 2025 with a 2.2% y/y gain. Much of the gain was driven by exports as US companies rushed to buy Canadian goods before US tariffs took effect in April.
At the same time, domestic demand remains weak and Canada’s counter-tariffs will make US products more expensive which will further dampen domestic demand.
The economy is showing cracks, including weak consumer spending, rising unemployment and uncertainty over trade tensions with the US, Canada’s largest trading partner.
The Bank of Canada responded to these concerns by staying on the sidelines at the rate meeting earlier in June. The BoC meets next on July 30 and unless the economic landscape improves we can expect the Bank to continue its wait-and-see stance and maintain interest rates.
The BoC will also be keeping a close eye on inflation ahead of the next meeting. The June inflation report showed CPI remained unchanged at 1.7%, below the BoC’s inflation target of 2%. If July inflation pushes lower, there will be pressure on the BoC to lower rates.
US Core PCE Price Index expected to rise to 2.6%
The US releases the Core PCE Price Index, the Fed’s preferred inflation indicator, later today. The market estimate stands at 2.6% y/y for May, compared to 2.5% a month earlier. Monthly, the index is expected to remain steady at 0.1%.
