Victoria Day Mortgage-Rate Update
May 20, 2025Why the Bank of Canada Will Probably Regret Not Cutting Last Week
June 9, 2025
The Bank of Canada (BoC) is not expected to cut this Wednesday. Bond-market investors now put the odds of no change at about 80%.
That consensus view was bolstered by the recent release of our April inflation data.
Our headline Consumer Price Index (CPI) fell from 2.3% in March to 1.7% in April on a year-over-year (YoY) basis. But that drop was entirely due to the elimination of the consumer carbon tax, which caused energy prices to plunge by 12.7% last month. Excluding energy, our CPI increased from 2.5% to 2.9% in April.
The BoC’s key measures of core inflation, which strip out the most volatile prices, also continued to rise in April:
- CPI-Trim increased from 2.9% in March to 3.1% in April YoY.
- CPI-Median increased from 2.8% to 3.2% over the same period.
In a perfect world the BoC wants its core measures to be bang on its 2% target. But at the very least, it needs them to remain within its broader target range of 1% to 3% if it wants to credibly claim that it is achieving its mandate of maintaining low and stable inflation.
Now that both core inflation gauges have risen above 3%, the BoC’s hands are effectively tied. That’s unfortunate because there are clear signs that our economy could otherwise benefit from monetary-policy stimulus:
- Our unemployment rate has risen steadily of late, and wage growth is now decelerating. As per economist David Roseberg, “less than 60% of Canadians who entered the labor market in the past twelve months in search of a job have managed to find one.”
- Our GDP data for Q1 was buoyed by a temporary import/export surge that was attributed to buyers front-running tariff deadlines. But consumer spending and business investment slowed to stall speed over the same period.
- Resale activity in our largest residential real-estate markets continues to underwhelm. Listings are up and sales are down.
- Increasing numbers of Canadian consumers are over-stretched, and there has been a recent surge in missed payments on both mortgage and non-mortgage debt. Canadian banks have already responded by bolstering their loan-loss provisions.
- The BoC’s most recent consumer and business confidence surveys show an increasing mix of pessimism and caution. Where that kind of soft data leads, the hard data typically follow.
One could easily argue that there are enough signs of economic weakness to justify a BoC cut this Wednesday if the Bank were to follow its oft-stated objective of skating where the puck is going. But US President Trump’s erratic tariff announcements have eliminated the Bank’s ability to forecast with any confidence.
In response, the BoC has become more reactive than pro-active. That focus on the here and now adds weight to the inflation pickup.
While I don’t expect a cut this Wednesday, I continue to believe that more cuts are on the way.
Put me down for a hold this Wednesday, but with accompanying policy-rate language to reassure Canadians that additional rate relief is still being actively considered.
The Bottom Line: Government of Canada bond yields decreased last week, but that didn’t stop some of the most competitively priced lenders from increasing their fixed rates as the spring market winds to a close.
The next catalyst for bond yields could come this Friday when we receive the April employment data for the US and Canada.
Although the BoC is unlikely to cut this Wednesday, I think variable-rate borrowers can still reasonably expect more cuts over the remainder of 2025.