The Bank of Canada (BoC) held its benchmark interest rate steady at 2.75% on Wednesday, signaling a cautious approach amid mixed signals from the Canadian economy. While growth data surprised to the upside in Q1, central bank officials warned of potential weakness ahead as trade uncertainty and inflation complicate the outlook.

BoC Governor Tiff Macklem said that economic activity had softened, though not sharply weakened, with a notable 2.2% annualized GDP growth in the first quarter fueled by strong exports and inventory buildup. However, officials expect a much slower pace in Q2, largely due to tariff-driven distortions and growing external pressures tied to U.S. trade policy.

“Faced with unusual uncertainty, the governing council is proceeding carefully,” Macklem said, suggesting that the central bank is taking a more reactive than proactive stance. He also noted that while rate cuts are not imminent, another move lower could be warranted if economic momentum falters. Roughly 20% of Canada’s GDP is linked to U.S. trade, leaving it particularly vulnerable to protectionist moves from Washington.

Despite recent signs of strain in the labor market and slowing domestic demand, the BoC prioritized inflation risks in its decision. Core inflation metrics have picked up, limiting the central bank’s flexibility to stimulate growth aggressively. Macklem emphasized that the council is “being less forward-looking than usual,” given the uncertain global landscape.

Most economists surveyed ahead of the decision — 11 out of 13 — correctly predicted the BoC would hold rates steady. The focus now shifts to incoming data and U.S. trade developments, with markets watching closely for signals of a potential rate cut in the months ahead if downside risks materialize.