Bank of Canada holds interest rate as it assesses risks amid tariff uncertainty
The Bank of Canada held its interest rate at 2.75 per cent on Wednesday, citing uncertainty brought on by United States trade policy for its first pause after a string of seven consecutive cuts that began in June 2024.
“At this meeting, we decided to hold our policy rate unchanged as we gain more information about both the path forward for U.S. tariffs and their impacts,” Bank of Canada governor Tiff Macklem said in prepared remarks in Ottawa. “Faced with pervasive uncertainty, Governing Council will proceed carefully, with particular attention to the risks.”
U.S. President Donald Trump’s trade actions have caused global market volatility and increased uncertainty for Canadian businesses and households. Tariffs remain in place on Canadian steel and aluminum, motor vehicles and goods not in compliance with the Canada-United-States-Mexico Agreement (CUSMA) . On April 2, Trump introduced tariffs on countries worldwide, before announcing a 90-day pause on April 9, while keeping a 10 per cent baseline tariff on most countries. Canada is not subject to the 10 per cent tariff.
“The path of U.S. trade policy remains highly unpredictable,” said Macklem. “There is also considerable uncertainty about the impacts of a trade war on our economy.”
In light of the volatility, the Bank of Canada did not think it was useful to provide a forecast, instead opting to publish two scenarios in its monetary policy report to help illustrate the possible impacts on the Canadian economy.
In “Scenario 1” the bank assumes most tariffs imposed are negotiated away, but the process remains unpredictable until the end of 2026. In “Scenario 2” a number of tariffs remain in place on a permanent basis, causing a long-lasting global trade war and ongoing uncertainty.
The first scenario shows Canada’s GDP stalling in the second quarter of 2025, with exports falling sharply and business investment contracting. Domestic demand is weak over the near term, with quarterly consumption growth modest in 2025, before slowly strengthening in 2026 and 2027. In this scenario, the removal of the federal consumer carbon price lowers energy prices starting in April of this year, reducing CPI inflation by 0.7 percentage points for one year and bringing average inflation for the year to 1.5 per cent.
The second scenario has Canada’s economy contracting over the next year, with growth averaging -1.2 per cent for four quarters, before gradually recovering to around 1.8 per cent in 2027. Inflation averages close to two per cent through the first quarter of 2026, before rising to three per cent in the second quarter, before going back down to two per cent in 2027. This scenario also has business investment declining significantly and an increase in unemployment, due to Canadian exporters reducing production and laying off workers.
“To be clear, these are only two of many possible scenarios, and even these do not span the possible outcomes,” said Macklem. “The April 2 announcement put the situation closer to Scenario 2, but the partial rollback on April 9 and new exemptions in recent days have moved trade policy back towards the middle of the two scenarios.”
The Canadian economy ended on a strong note at the end of 2024, but trade uncertainty is already having an impact this year. The Bank of Canada estimates growth to have slowed to 1.8 per cent in the first quarter of 2025 and growth in consumption to have slowed from 5.5 per cent in the fourth quarter of 2024, to 1.5 per cent during the first quarter of this year. Business investment is expected to have declined by two per cent, reflecting the results from the bank’s recent business outlook survey which showed a large portion of firms planned to hold back on strategic new investments, in light of the trade situation.
Macklem reiterated that monetary policy cannot completely offset the impacts of a trade war, but the central bank will continue to monitor not only the uncertainty associated with the tariffs, but the uncertainty of how businesses, households and governments will react to those tariffs.
“Monetary policy will ensure inflation remains well controlled and support economic growth as Canada confronts this unwanted trade war,” said Macklem. “As always, we will be guided by our monetary policy framework and our commitment to maintain price stability over time.”
• Email: jgowling@postmedia.com
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