As Bank of Canada holds rates, experts say a cut alone won't stop an economic slowdown

The Bank of Canada held interest rates at 2.75 per cent on Wednesday, pointing to a mixed bag of unexpectedly strong data and the uncertainty of U.S. tariffs as reason for the hold — and some experts say, going forward, rate cuts alone won't be enough to stop an economic slowdown.

In his opening remarks to reporters, governor Tiff Macklem characterized the Canadian economy as "softer but not sharply weaker" and said the central bank's governing council was in agreement about today's rate decision. The decision marks the second consecutive hold since March.

Economists had largely pivoted from initial expectations the central bank would cut the interest rate by 25 basis points after the first-quarter GDP came in at an annualized rate of 2.2 per cent last week, which was stronger than anticipated.

That strength was largely due to a surge in exports, with businesses stocking up on inventory before U.S. President Donald Trump's initial round of tariffs went into effect in the spring.

But Macklem was quick to curb any enthusiasm around the latest GDP reading, saying that "the first quarter borrows economic strength from the future, so the second quarter is expected to be much weaker."

WATCH | The impact of new U.S. tariffs:

Bank of Canada governor Tiff Macklem, speaking after again holding a key interest rate steady, was asked whether persistent economic uncertainty suggests a need for further rate cuts.

Likewise, recent headline inflation showed that price growth had slowed to 1.7 per cent in April, largely due to the end of the consumer carbon tax. However, core inflation — the Bank of Canada's preferred measure of price growth, because it strips out sector volatility and one-time tax changes — crept up above three per cent, well beyond the Bank of Canada's target of two per cent.

"That has got our attention," Macklem told reporters, saying the uptick "does make you think that underlying inflation could be a little firmer than we thought."

Even if the central bank had cut rates by 25 basis points, it wouldn't have much of an effect on housing, said Toronto real estate broker John Pasalis in an interview with CBC News.

"The housing market right now is stalling largely because of all of the economic uncertainty," Pasalis said. "Lower rates are not going to push people back into buying a home if they're worried they're going to lose their jobs."

The central bank noted Wednesday that national housing activity had declined in the first quarter, mostly because of a drop in the resale market. National prices are down slightly on a year-to-year basis, too.

Pasalis said he doesn't expect activity to pick up this summer, though that could change by the fall, should the Bank of Canada opt to cut rates to two per cent over the next several meetings.

Still, lower interest rates need to be matched with "more clarity on the economy, on the trade war," he said, to stimulate the housing market.

"I don't think it's an affordability issue right now. I think the big issue is just lack of confidence."

Andreea Bourgeois, director of economics at the Canadian Federation of Independent Business in Moncton, N.B., said she thinks small businesses are probably "OK" with the decision to hold the interest rate.

Rate cuts always help small businesses, Bourgeois said. What they're really looking for at this point, however, is "a sign that the bank believes the economy can grow and a bit of a push for businesses to actually invest and to not lay off people," she said.

"'We want businesses to spend, we want businesses to invest, we want to stimulate demand. [That's] the sign that would be super important for small businesses."

The Bank of Canada noted in its first-quarter business outlook survey, released in April, that businesses had expressed less confidence in the direction of the economy, with the firms surveyed less eager to invest and hire because of the trade conflict with our U.S. neighbours.

"They're not looking yet to cut down on their business products. They're not looking to lay off in mass," acknowledged Bourgeois. "But you don't see the other behaviour, either," she said, referring to investment and hiring, which she argued shows a lack of optimism in the economy.

Other industry leaders agreed that businesses are looking for more than a rate cut right now.

Flavio Volpe, president of the Automotive Parts Manufacturers' Association in Toronto, said that his organization was hopeful. "But also, frankly, a rate change isn't going to get us out of the problem," he said.

Dennis Darby, president and CEO of the Canadian Manufacturers and Exporters, shared a similar sentiment, saying it's "critically important" for Canada to push for certainty in its relationship with the U.S.

That won't come from the Bank of Canada, he said: "That's obviously the government's responsibility."

The central bank chose a cautious approach on Wednesday, and its decision to hold off on a rate cut is a risky one, said Royce Mendes, managing director and head of macro strategy at Desjardins.

The hold sends the message that there's "a reluctance to support the economy," and could lead businesses and households to make different financial and investment decisions, Mendes said.

"They start to pull back because they worry that there's no safety net in sight. Or businesses decide not to invest more because they think, 'Well, no one's here to help us with this trade war.' And I think those are the risks that the Bank of Canada has taken by holding rates steady today."

Macklem didn't rule out a rate cut at the central bank's meeting in July, should economic growth slow and inflation pressures ease. But he said the governing council, while in agreement about Wednesday's decision, had so far shared a "diversity of views" when it came to the future.

WATCH | Will uncertainty tilt the Bank of Canada toward a future rate cut?:

As U.S. President Donald Trump applies 50 per cent tariffs to all steel and aluminum imports, the Bank of Canada says it will hold its benchmark interest rate at 2.75 per cent. Senior business reporter Peter Armstrong says the economic uncertainty caused by fluctuating U.S. trade policy is driving investment away from Canada.

"Faced with unusual uncertainty, [the council] is proceeding carefully, with particular attention to the risks," Macklem said in his remarks. "This means we are being less forward-looking than usual."

Leslie Preston, managing director and senior economist at TD Economics, said that the uptick in core inflation — competing with job loss, weaker demand in the domestic economy and a soft housing market — put the Bank of Canada "in a bind."

"We expect that barring a trade negotiation miracle with the Trump administration, Canada's economy is likely to tip into recession this year, and more interest rate cuts will be required," Preston wrote.