**Prime Minister Mark Carney and U.S. President Donald Trump.**

Prospects for another Bank of Canada interest rate cut are shifting after a stable inflation report for May was followed by an unexpected decline in the latest monthly GDP data.

Canada’s economy shrank 0.1% on a monthly basis in April, Statistics Canada said Friday, as the impacts of the U.S. tariff war were felt in broad-based weakness in the manufacturing sector. The April reading fell short of the agency’s own preliminary estimate of a 0.1% increase and trailed economists’ projections for a flat print.

Manufacturing fell 1.9 per cent in April, the sharpest decline since the pandemic disruption in 2021, reflecting large declines in durable goods subsectors connected to transportation equipment production and motor vehicle manufacturing.

Motor vehicle production fell 5.2 per cent, coinciding with lower exports of passenger cars and light trucks as some motor vehicle manufacturers scaled back production amid uncertainty related to tariffs imposed on vehicle exports to the U.S., StatsCan said. The largest declines in the non-durable goods sectors were seen in petroleum, food and coal product manufacturing.

StatsCan said economic growth is expected to contract by 0.1 per cent again in May, signalling slower growth in the second quarter of the year. However Friday’s GDP report was tempered by an upward revision to the March reading to 0.2% growth.

Still, the output data increases the likelihood of another cut by the Bank of Canada when it next meets to set interest rates on July 30.

Sticky price pressures

Until Friday, analysts had generally expected the Bank to stand pat at 2.75%, based on the CPI data released earlier this week. At 1.7 per cent, inflation was unchanged from the previous month but underlying price pressures remained sticky and the central bank has expressed concern that more inflation could be coming as a result of U.S. tariffs and Canada’s counter tariffs.

Much will depend on whether Bank Governor Tiff Macklem sees the slowdown in GDP as mild, given the unusually negative forces at work in the ongoing trade war, or a sign that the country is headed into a serious recession.

“We think that the outlooks for growth and inflation have since moved the BoC a bit closer to delivering a 25 bps interest cut in July, but a bit more evidence will be needed for a decisive move,” TD Bank economist Marc Ercolao said in a written comment. “With Canada's labour market showing cracks, consumers reigning in spending, and the housing market visibly strained, we think the BoC has headroom to cut the policy rate two more times this year.”

Economists say Macklem will be looking carefully at the next GDP data and another inflation report, both due out before the BoC’s next decision. Macklem has announced two quarter-point cuts this year, but has stood pat at the BoC’s last two meetings.