The Bank of Canada kept its policy interest rate at 2.75 per cent amid rising inflation expectations and trade policy uncertainty.
This hold marks the first pause after seven consecutive cuts as inflation eased back to target and the economy began growing.
There is no denying that Canada’s central bank places utmost importance on higher inflation outlook. U.S. tariffs on Canadian imports came into effect in March and April on a wide range of products, from goods not in compliance with the countries’ free-trade agreement to steep measures on steel, aluminum and autos.
With those came Canada’s retaliatory actions, which raised short-term inflation expectations among businesses. The Bank of Canada cannot prevent a recession or dictate trade policy, but it can use interest rates to maintain price stability.
As the policy rate inches closer to neutral, expect a possible rate cut in June. As recession risks rise, the Bank of Canada will need to weigh concerns about growth over those about inflation.
Even though inflation fell to 2.3 per cent in March, this is largely due to falling oil prices—which can be highly volatile.
The reality is that the volatility coming from the U.S. is simply too high and is already hurting Canada’s economy. Uncertainty deters business hiring and investments, as the constant, abrupt changes prevent businesses from making long-term investment decisions and planning.
The high number of full-time jobs lost in March underscores the effects of uncertainty on the Canadian economy. Consumers also started cutting back purchases as they anticipate job losses and a recession.
The effects of extreme volatility are also evident in financial markets amid the constant shifting of tariff announcements on asset prices. Oil prices also took a dive as global growth outlook sour.
The Canadian dollar gained some strength, but this is mainly because of the weakening of the U.S. dollar rather than due to the Canadian economic outlook.
Growth in the first quarter is expected to be relatively flat, but contract in the second quarter as manufacturing halts and businesses suspend hiring and investments.
The Bank of Canada outlined two main scenarios in its monetary policy report.
In the first scenario, tariffs on Canadian imports into the U.S. remain limited—as has been the case since Canada was exempt from the storm of U.S. global tariffs announced in early April. Canada could be in a period of sluggish growth, but narrowly escapes a recession; inflation would stay near target.
In the second scenario, a long-lasting global trade war ensues. Canada would be in a truly difficult position with a recession plus higher prices given the degree of integration between the Canadian and U.S. economies. Inflation would rise above 3 per cent in 2026 as supply chain disruptions and tariffs raise cost before easing as weak consumer demand places downward pressure on inflation.
Going forward, the Bank of Canada will need to continue making policy interest rate decisions one at a time to account for constantly shifting dynamics across jobs, prices and financial markets.
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