Bank of Canada Holds Policy Rate Steady

Today, the Bank of Canada once again held the policy rate at 2.25%. This is the bottom of the Bank’s estimate of the neutral overnight rate, where monetary policy is neither expansionary nor contractionary. With inflation hovering at 2.8% and core inflation falling to 2.0% (as of April data), the Governing Council sees the current overnight rate as appropriate, as the Bank continues to look through the inflationary impact of the war in Iran. The war is in its fourth month, and oil prices and interest rates have risen considerably as a result. The war is disrupting supply chains, weakening economic activity and pushing up inflation. At the same time, the US administration continues to propose new tariffs, and the future of CUSMA remains uncertain.

CUSMA negotiations are underway, but they are unlikely to go on beyond the July 1 mandatory date for the formal review of the pact required by the treaty. On that date, the U.S., Canada, and Mexico are each supposed to declare whether they want to renew the deal for another 16 years (out to 2036), renegotiate it, or decline to renew. The three countries are set to miss the July 1 renewal milestone, with negotiations expected to stretch on for months or potentially years. Missing the date does not kill the deal. If the three don’t agree to a full 16-year extension, the agreement stays in force and shifts into a mechanism of rolling annual reviews that can continue for up to a decade. The treaty doesn’t formally expire until July 1, 2036, unless a party withdraws entirely. US Trade Representative Jamieson Greer said that on July 1, “I don’t think we’re going to renew it outright, but we’ll engage in the separate negotiations” — explicitly signalling the date is a starting point, not a hard conclusion. Dominic LeBlanc, the minister responsible for US trade, met with Greer in Washington and afterward suggested that July 1 “shouldn’t be seen as a crucial date.” Mexican and US officials say the scope and complexity of the issues — auto rules of origin, the 50% Section 232 steel/aluminum tariffs, and other disputes — make resolution by July 1 unlikely.

While first-quarter GDP growth in Canada showed a small contraction, economic growth has been solid in the US, boosted by consumption and AI-related investment. In the euro area, growth is subdued, with higher energy prices weighing on activity. China’s economic growth continues to be supported by strong exports, while oil imports have slowed substantially. Oil demand destruction is evident as China has chosen to limit energy use and draw down inventories.

Financial conditions in Canada have eased since the April Monetary Policy Report (MPR). Global equity markets have been buoyant, and bond yields, though volatile, have generally trended higher. The Canadian dollar has weakened against the US dollar and other currencies.

Canada’s economy contracted in the final quarter of last year. It weakened a bit further in Q1, but incoming data suggest that the first-quarter figure was weighed down by the 10% surge in imports, which has already reversed in the newly released April merchandise trade data. The flash estimate for April GDP is a more solid 0.4% quarter-over-quarter level (or 1.6% at an annual rate). The central bank expects growth to rebound in Q2, but even so, the economy is expected to remain in excess supply.

As expected, Canadian CPI inflation rose to 2.8% in April. Measures of core inflation declined to about 2%, and the share of CPI components growing above 3% is close to its historical average. Food price inflation moderated but remains high, and shelter inflation continued to slow. With global oil prices still elevated—roughly $10 per barrel above our April MPR assumptions—total inflation is expected to hover around 3% in the near term before gradually easing towards 2%.

In other news, the US CPI inflation report for May was released this morning:

• US inflation accelerated again in May as the war in Iran pushed up energy prices, outpacing wages for a second straight month. The US consumer price index climbed 4.2% from a year earlier, the most since early 2023.
• Core CPI, which excludes food and energy, increased 0.2% from April, a touch below expectations and taking some of the sting out of the Fed debate.
• The energy index rose 3.9% in May, accounting for over 60% of the monthly all-items increase.
• But other categories saw slower gains or outright declines: Grocery prices rose 0.1%, while transportation services, health insurance and new vehicle prices fell.
• The breadth of price increases also declined, providing another sign that inflation has likely peaked.
• The S&P 500 opened lower while Treasuries and the dollar wavered on the news.

Overall, today’s US CPI report sent a clear signal that consumers are pulling back on nonessential spending, pushing back against businesses’ attempts to raise prices. This should ease fears of Fed rate hikes following the blowout May payrolls report. Bloomberg News suggests that they still expect the Fed to hold rates steady at the June 12 meeting and to cut the overnight fed funds rate by 25 basis points in the fourth quarter of this year.

Bottom Line

The Bank of Canada has shown its willingness to bolster the Canadian economy amid unprecedented trade uncertainty and a record oil price shock. Ottawa, too, has taken actions to reduce the burden of higher prices on Canadians by temporarily eliminating the excise tax on oil. PM Carney is also working to diversify Canada’s trade away from the US, a strategy that has thus far been remarkably successful. As the charts below show, Canadian export diversification is gaining momentum. In addition, goods imports are also shifting away from the US to the rest of the world.

We continue to maintain the view that the Bank of Canada will keep rates steady this year. If inflation broadens and accelerates, rate hikes are possible, but that is not our baseline forecast. The Bank of Canada will be reluctant to tighten into housing market weakness. While housing activity strengthened in May, momentum is muted, and affordability improvements are likely to taper off in the coming months as trade tensions and the war keep oil prices and interest rates elevated.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

So Much For Recession Worries, The May Jobs Report For Canada Was A Blockbuster

Canadian employment surged 87,800 in May, the strongest reading since 2024. Today’s Labour Market Survey dispels recession concerns, but leaves the Bank of Canada open to a possible rate hike later this year or next if inflation remains troubling. The Canadian economy continues to show resilience in the face of tariffs and oil price increases.

The headline job gain, combined with a 3,800 rise in the size of the labour force, drove the unemployment rate down three basis points to 6.6%. The jobless rate is still in the 6.5%- 7.0% range seen over the past year. The employment rate rose 0.2 percentage points to 60.7%.

The report’s details were also stronger than expected. The unemployment rate for youth declined 0.9 percentage points to 13.4%. The rate also fell among core-aged women (-0.4 percentage points to 5.5%) and core-aged men (-0.4 percentage points to 5.7%).

Employment increased in several industries, most notably in construction (+27,000; +1.7%), information, culture and recreation (+19,000; +2.3%), transportation and warehousing (+19,000; +1.7%) and accommodation and food services (+17,000; +1.5%). On the other hand, employment decreased in wholesale and retail trade (-35,000; -1.2%).

Hiring also rose in manufacturing in May (+15,000; +0.8%). Hiring in this industry was little changed compared with 12 months earlier, but down 44,000 (-2.3%) from January 2025. The manufacturing sector has faced heightened economic uncertainty since early 2025, driven by U.S. tariff policies.

Employment rose in Ontario (+42,000; +0.5%), British Columbia (+25,000; +0.9%), Alberta (+14,000; +0.5%), and Prince Edward Island (+1,200; +1.3%), while it fell in Saskatchewan (-6,100; -1.0%).

Average hourly wages among employees increased 3.0% (+$1.10 to $37.24) on a year-over-year basis in May, following growth of 4.5% in April (not seasonally adjusted).

Hiring gains in May were the first significant job growth since November 2025. The increase in May follows a net decline of 112,000 (-0.5%) over the first four months of 2026. On a year-over-year basis, employment was up by 147,000 (+0.7%) in May.

The number of people working full-time rose by 154,000 (+0.9%) in May. The increase in the month offsets a downward trend observed from January to April, in which the number of full-time workers fell by 156,000 (-0.9%). In May, part-time employment decreased by 66,000 (-1.7%).

Employment rose among employees in both the private sector (+56,000; +0.4%) and the public sector (+20,000; +0.4%) in May. The number of self-employed workers was little changed.

Since the spring of 2024, the unemployment rate has remained above its average (6.0%) observed from 2017 to 2019, prior to the COVID-19 pandemic. The unemployment rate reached a recent peak of 7.1% in August and September 2025.

As employment picked up in May, the job-finding rate ticked up, with just over one-quarter (26.3%) of people who were unemployed in April found work in May. This was up 3.7 percentage points compared with the same period last year but remained below the pre-pandemic average for the corresponding months from 2017 to 2019 (31.5%). At the same time, the layoff rate remained relatively stable at 0.6%, little changed compared with a year earlier and in line with the pre-pandemic average (not seasonally adjusted).

The unemployment rate in the Toronto census metropolitan area fell 1.1 percentage points to 6.8% in May, the lowest level since November 2023. The rate in May 2026 was down from a recent peak of 9.0% in May 2025 and July 2025. Recent declines in Toronto have brought its unemployment rate closer to the rate observed in Montréal (6.5%) and Vancouver (6.4%) in May 2026.

The jobless rate also fell in Montréal (-1.2 percentage points) in May, largely offsetting the increase recorded in the previous month. In Vancouver, the unemployment rate decreased 0.6 percentage points to 6.4%. In both Montréal and Vancouver, the unemployment rate in May was virtually unchanged year over year.

In separate news, US hiring also surged in May, boosting bets on a Fed rate hike. Stocks and bonds in Canada and the US sold off on the news. US job growth topped all forecasts in May, and the unemployment rate held steady at 4.3%, offering the clearest sign yet that the labour market may be breaking out of a prolonged period of lacklustre hiring.

Nonfarm payrolls increased 172,000 last month, and hiring in March and April was stronger than previously reported, according to Bureau of Labour Statistics data out Friday. Taken together, the figures marked the strongest three-month advance in more than two years.

Bottom Line

These blockbuster jobs reports, accompanied by inflation risk stemming from high tariffs and the war in Iran blocking the Strait of Hormuz, are troubling for both stocks and bonds.

The relative weakness of the Canadian labour market will discourage the Bank of Canada from tightening monetary policy too soon. To be sure, inflation remains a risk as higher energy costs become embedded in the price of a wide array of goods and services. The Bank will be reluctant to respond with rate hikes over the next few announcement dates.

Trade negotiations are accelerating as the future of CUSMA is determined. It is hard to imagine the Bank of Canada tightening in the face of such a weak housing market. Early evidence suggests housing activity picked up in May, but the sector remains vulnerable to rising interest rates. Although both the Fed and the BoC have remained on the sidelines so far this year, market-driven interest rates have risen considerably owing to the sharp rise in inflation pressures. Housing is a much larger component of economic activity in Canada than in the US. The Bank of Canada, therefore, will be particularly leery of tightening monetary policy. We hold to the view that central bank rate hikes in Canada and the US are unlikely this year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca