BoC kept its overnight rate unchanged at 2.75% as expected, opting for caution amid lingering uncertainty over US trade policy. While acknowledging a “softer but not sharply weaker” economy, the Governing Council pointed to recent inflation data that showed “unexpected firmness,” warranting a wait-and-see approach before committing to further policy moves.
In its accompanying statement, BoC emphasized that it is carefully weighing both “downward” and “upward” pressures on inflation. A slower economy is expected to restrain price growth, but tariff-related cost increases could do the opposite.
Key concerns for the central bank include the potential drag from reduced US demand for Canadian exports, spillovers into business confidence and employment, and whether cost increases are being passed on to consumers.
US ISM services falls to 49.9, prices jump to highest since late 2022
US ISM Services PMI slipped unexpectedly into contraction territory in May, falling from 51.6 to 49.9, its first sub-50 reading since June 2024 and well below market expectations of 52.0.
The drop was driven by sharp declines in both business activity, which fell from 53.7 to the breakeven 50.0, and new orders, which plunged from 52.3 to 46.4, indicating a broad-based pullback in demand. On the brighter side, employment rebounded into slight expansion at 50.7.
The ISM noted that the weakness is “not indicative of a severe contraction”, but rather widespread uncertainty, particularly related to trade policy. The average PMI reading over the past three months, at 50.8, suggests overall stagnation and marks a notable shift lower from the 52.8 average of the prior nine months.
Most concerning is the sustained upward pressure on costs. The Prices Index rose to 68.7, its highest level since November 2022. That’s the time when CPI rose 7.1%.
Full ISM services release here.