A cyclist rides past the Bank of Canada building in Ottawa, Ontario, Canada May 8, 2025. REUTERS/Blair Gable

By Promit Mukherjee and David Ljunggren

OTTAWA (Reuters) -The Bank of Canada on Wednesday held its key benchmark rate at 2.75%, citing the need to probe the effects of U.S. trade policy, but said another cut might be necessary if the economy weakened in the face of tariffs.

The decision marks the second time in a row that the central bank has remained on the sidelines after an aggressive cutting cycle which shrunk rates by 225 basis points over nine months.

"The trade conflict initiated by the United States remains the biggest headwind facing the Canadian economy," Governor Tiff Macklem told a news conference, describing U.S. trade policy as highly unpredictable.

"There was a clear consensus to hold policy unchanged as we gain more information," he said.

U.S. President Donald Trump on Wednesday doubled the tariff on imports of Canadian steel and aluminum to 50%.

The bank says it is weighing upward pressure on inflation from higher prices and downward pressure from sluggish growth.

Before the next BoC decision in July, there will be two more months' of inflation data and one GDP data.

"On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued U.S. tariffs and uncertainty, and cost pressures on inflation are contained," he said, in his opening remarks.

Economists are expecting there could be between two and three more cuts this year and the final rate by the end year would likely end around 2%.

"July looks more promising for a quarter point ease if, as we expect, the jobless rate continues to move higher, and inflation in items not subject to tariff pressures eases off a bit," said Avery Shenfeld, managing director and chief economist at CIBC in a note.

Currency swap markets bets showed that the odds of another hold on July 30 were around 55%. The July decision will also be accompanied by the bank's monetary policy report.

The Canadian dollar firmed further and was trading up 0.14% to 1.3698 to the U.S. dollar or 73 U.S. cents.

Canada's annual inflation rate fell to 1.7% in April due to a drop in energy prices, but closely tracked core measures of inflation rose above the bank's target range of 1% to 3% in the same month.

"Higher core inflation can be partly attributed to higher goods prices, including food, and may reflect the effects of trade disruption," Macklem said.

Macklem said recent surveys showed consumers were bracing for higher prices and many businesses say they intend to pass on tariff costs.

Lingering uncertainty on the impact of tariffs, the outcome of trade negotiations and new trade actions means the bank will be less forward looking, Macklem said, repeating his comments from April.

In April, the bank had provided two scenarios for economic growth under tariffs where the second assumed a global trade war and recession.

Macklem said since the scenarios were issued, the concerns of the economy tilting towards second has reduced to some extent.

First-quarter growth was better than expected but the business investment and domestic spending were largely subdued. Economists predict this trend is likely to continue, and Macklem said second quarter growth would be substantially weaker.

(Reporting by Promit MukherjeeEditing by Nick Zieminski)