Expectations for further

interest rate

cuts this year from the

Bank of Canada

are slowly evaporating.

Economists at two of Canada’s largest lenders, Bank of Nova Scotia and

Royal Bank of Canada

, now say governor

Tiff Macklem

and his officials will keep their benchmark rate at 2.75 per cent through the end of 2025.

Holding it at the level where it’s been since March would keep the rate at the midpoint of the central bank’s estimated “neutral range” — in other words, it’s a policy that’s neither stimulative nor restrictive for economic growth.

For Canadian policymakers, that’s a good place to wait out the storm of uncertainty posed by

U.S. President Donald Trump

’s tariffs, while gauging recent inflation pressures. Some other major central banks have also made the decision to pause further rate moves.

Markets are also reducing bets for further easing this year. Just last month, traders in overnight swaps had fully priced another 25 basis point cut this year. By Friday, the odds of that outcome had fallen to just above half.

The Canadian economy is vulnerable to Trump’s trade policy due to its reliance on U.S. trade and

supply chains

. But so far, growth appears to be holding up far better than the worst-case recessionary outcomes projected by economists earlier this year.

“Informal conversations with clients suggest a more optimistic view of the outlook relative to the last few months,” Scotiabank analysts led by chief economist Jean-Francois Perrault wrote in a report to investors. “This is not to say the economy is strong, it remains weak across a broad range of indicators, but on balance the economy is less weak than we had earlier assumed.”

‘High bar’

Trump has threatened to hike duties on some Canadian products to 35 per cent on Aug. 1, which would damage confidence. Despite that, decent economic data over the past few weeks has played a major role in taming expectations for rate cuts.

The

labour market

surprisingly added more than 83,000 jobs last month, and the unemployment rate of 6.9 per cent is only a little bit higher than at the start of the year. The “Buy Canada” movement helped buoy consumption and is likely boosting domestic travel spending. And more firms were getting exemptions from tariffs under the

Canada-U.S.-Mexico trade agreement.

With the economy grinding along, core inflation that’s stuck above three per cent is a focus for policymakers on the central bank’s rate-setting council. Officials are closely watching the extent to which firms are passing tariff costs to consumers and how higher prices influence inflation expectations.

Prime Minister Mark Carney

’s promises for higher defense and infrastructure spending, as well as the anticipated aid packages for tariff-hit sectors, point to deeper deficits and a short-term economic boost from fiscal policy.

“Broadly, that kind of a backdrop — better than feared growth and higher than wanted inflation topped with in the prospect of significant fiscal stimulus spending in the year ahead — leaves a high bar for the bank to make additional interest rate cuts this year,” Royal Bank’s Nathan Janzen and Claire Fan wrote in a report.

Economists at Bank of Montreal and Toronto-Dominion Bank’s securities arm, on the other hand, still see at least one more rate cut this year, with four rate decisions remaining.

  • Inflation slams door ‘shut’ on July rate cut
  • Hike in jobless rate to sway BoC to cut rates

Yields further out on the curve are elevated. The yield on the benchmark five-year note, which plunged to 2.5 per cent in the immediate aftermath of Trump’s early April tariff shock, was at 3.1 per cent at the end of last week. That means no quick relief for the country’s housing market, where affordability problems persist in cities like Toronto and Vancouver.

Higher rates also have implications for the government’s debt servicing costs. A debt management plan released last week shows a record bond and bill issuance, tilted toward treasury bills and shorter-term debt. With Carney set to erode the federal balance sheet to make investments in the economy, interest expenses are likely to eat up more taxpayer dollars than previously expected.

Bloomberg.com