The Bank of Canada has decided to maintain its current interest rate, citing the uncertainty surrounding U.S. tariffs and their potential impact on the Canadian economy. In a statement delivered by Governor Tiff Macklem, the Bank of Canada expressed caution, stating that it would continue to monitor developments closely. “Faced with pervasive uncertainty, the Governing Council will proceed carefully, with particular attention to the risks,” Macklem said in prepared remarks during a recent speech in Ottawa.
U.S. Tariffs and Trade Tensions
U.S. President Donald Trump’s trade policies have caused significant volatility in global markets, leaving Canadian businesses and households facing heightened uncertainty. Tariffs continue to affect Canadian industries, including steel, aluminum, and motor vehicles, which are subject to ongoing duties under the Canada-United States-Mexico Agreement (CUSMA).
In early April, Trump introduced new tariffs on various countries, only to announce a 90-day suspension on April 9, while maintaining a 10% baseline tariff on most nations. Canada, however, is not affected by the 10% tariff.
Macklem commented on the unpredictable nature of U.S. trade policies, emphasizing the risk to Canada’s economic stability. “The path of U.S. trade policy remains highly unpredictable,” he said. “There is also considerable uncertainty about the impacts of a trade war on our economy.”
Bank of Canada’s Economic Scenarios
Given the volatile environment, the Bank of Canada has opted not to provide a specific economic forecast. Instead, it published two potential scenarios to illustrate the risks posed by trade policy changes.
In Scenario 1, the Bank assumes that most tariffs will eventually be negotiated away, although the process will remain unpredictable until the end of 2026. Under this scenario, Canada’s GDP growth is expected to stall in the second quarter of 2025, with a sharp decline in exports and business investment. Domestic demand is expected to remain weak in the short term, with moderate consumption growth. The reduction of the federal consumer carbon price will lower energy prices, resulting in a 0.7 percentage point reduction in CPI inflation, bringing the average inflation rate for the year to 1.5%.
Scenario 2 presents a bleaker outlook, assuming that a number of tariffs remain in place permanently. This could lead to a prolonged global trade war, pushing Canada’s economy into contraction. Under this scenario, Canada’s growth would average -1.2% over four quarters before recovering to 1.8% by 2027. Inflation is expected to remain around 2% until the second quarter of 2026, when it may rise to 3% before falling back to 2% by 2027. Unemployment is projected to increase as Canadian exporters reduce production and lay off workers.
Macklem was quick to note that these are just two potential scenarios, and the actual outcome could vary significantly. He acknowledged that the recent pause in tariff actions could move the situation closer to a middle ground between these two extreme scenarios.
Canada’s Slower Growth in 2025
The Canadian economy showed strong performance at the close of 2024. However, the ongoing trade uncertainty is already having noticeable effects in 2025. The Bank of Canada estimates that economic growth slowed to 1.8% in the first quarter of the year, compared to a much stronger 5.5% growth in the final quarter of 2024.
Consumption growth also decelerated, falling to just 1.5% in the first quarter of 2025, while business investment saw a decline of 2%. A recent business outlook survey conducted by the Bank indicated that many Canadian firms are holding off on making strategic new investments, citing the uncertainty created by trade policies as the primary reason for caution.
Why the Bank Didn’t Cut Rates
Despite the slowdown in business investment, lower consumer spending, and decreased real estate activity, the Bank of Canada opted not to cut interest rates. Governor Macklem explained that the central bank is proceeding with caution in an environment of heightened trade uncertainty.
“Our goal is to ensure that Canadians stay confident in price stability,” Macklem stated.
Market Expectations for Future Rate Cuts
Despite the Bank’s decision to hold the rate steady, analysts predict that further rate cuts could be on the horizon. Bank of Montreal’s chief economist, Douglas Porter, said that while the current economic landscape is highly fluid, the Bank of Canada is likely to reduce rates later in 2025. He argued that the deepening trade uncertainty will weigh heavily on growth, thereby blunting inflation pressures.
“We believe that the deep trade uncertainty will weigh heavily on growth in Q2 and Q3, blunting inflation pressures, and eventually prompting the bank to trim rates further,” said Porter in a note to clients.
David Rosenberg, founder of Rosenberg Research & Associates, warned of an “economic storm” ahead, with the potential for the unemployment rate to climb to as high as 8%. He expects that the Bank of Canada will continue its easing cycle, likely lowering rates more than the two cuts that are currently anticipated by the market.
The Role of Monetary Policy
Governor Macklem emphasized that while monetary policy plays a key role in supporting the economy, it cannot fully offset the impacts of a global trade war. The Bank of Canada will continue to focus on maintaining price stability and monitoring the reactions of businesses, households, and governments to the evolving trade situation.
“Monetary policy will ensure inflation remains well controlled and support economic growth as Canada confronts this unwanted trade war,” Macklem said. “As always, we will be guided by our monetary policy framework and our commitment to maintain price stability over time.”
