The Bank of Canada is holding interest rates steady as U.S. President Donald Trump’s trade war with Canada intensifies.
The central bank held its benchmark rate at 2.75 per cent on Wednesday, ending a streak of seven consecutive rate cuts.
Analysts were divided on what to expect from the Bank of Canada, with some saying they expected a 25 basis point cut and others expecting the rate to be held steady.
“The major shift in direction of US trade policy and the unpredictability of tariffs have increased uncertainty, diminished prospects for economic growth, and raised inflation expectations. Pervasive uncertainty makes it unusually challenging to project GDP growth and inflation in Canada and globally,” the Bank said in a statement.
The bank said “extreme market volatility” was adding to global economic uncertainty and declining oil prices reflected weaker prospects for global growth. It said tariff uncertainty continued to slow the Canadian economy down and affect consumer and business confidence.
“Consumption, residential investment and business spending all look to have weakened in the first quarter. Trade tensions are also disrupting recovery in the labour market. Employment declined in March and businesses are reporting plans to slow their hiring. Wage growth continues to show signs of moderation.”
Overall inflation eased for Canadians in March, but the end of the GST/HST holiday and Trump’s trade war continues to stress consumers in Canada. Statistics Canada said Tuesday that the annual pace of inflation cooled to 2.3 per cent in March, compared to 2.6 per cent the month before.
‘The future is no clearer’
Speaking to reporters in Ottawa after the announcement, Bank of Canada Governor Tiff Macklem said, “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.”
He added, “A lot has happened since our March decision five weeks ago. But the future is no clearer. We still do not know what tariffs will be imposed, whether they’ll be reduced or escalated, or how long all of this will last.”
Macklem said he expects domestic demand in Canada to be relatively flat in the first quarter of 2025 and economic growth in the second quarter to be weaker.
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“Looking beyond the very near term, what happens to the Canadian economy and inflation depends critically on U.S. trade policy, which remains highly unpredictable,” he said.
Macklem said there were two likely scenarios facing the Canadian economy. In the first scenario, Macklem said, most of the new tariffs will get “negotiated away.” In this scenario, GDP growth would stall in the second quarter but expand moderately later. Inflation would drop below two per cent in this scenario in 2025 and 2026, he said.
The second scenario assumes a “long-lasting global trade war.”
“The economic consequences (of a long-lasting trade war) are severe. Canada’s GDP contracts in the second quarter and the economy is in recession for a year. Growth gradually returns in 2026 but remains soft through 2027 as U.S. tariffs permanently reduce Canada’s potential output and lower our standard of living,” he said, adding that inflation would rise above three per cent by mid-2026.
‘Balancing act’
Doug Porter, chief economist at BMO Economics, said the Bank of Canada decided to not rock the boat in a volatile economic climate.
“It was seen as being a very close call, both by economists and markets,” Porter said.
“The main message that we heard from the Bank today is look that this is an incredibly volatile situation that could change on a dime. And the Bank is prepared to act as decisively as need be as things clear up,” he said, adding that the markets did not react adversely to the rate announcement.
RBC economist Claire Fan said the future outlook for inflation remains uncertain,
“The future path of inflation beyond the very near-term (where the end of consumer carbon tax is expected to lower headline CPI) remains highly uncertain, subject to changes in volatile U.S. trade policy,” she said in a note Wednesday.
Fan said Canada could see unemployment jump in the coming year.
“We don’t look for a recession in Canada this year, but do expect further pull back in hiring demand will push the unemployment rate higher to above 7% over the second half of the year,” she said.
Andrew DiCapua, principal economist at the Canadian Chamber of Commerce, said the Bank of Canada placed concerns around inflation at the forefront of its decision.
“They’re increasingly concerned about inflation risks. Higher pricing and tariff costs highlighted in their latest survey tipped the balance of risks, leaving them to pause in absence of convincing data,” he said.
“I’m not surprised that the Governor struck a relatively dovish tone, recognizing that incoming data will likely force the Bank to lower interest rates, which are not currently providing much stimulus to the economy.”
Tu Nguyen, economist at RSM Canada, said, “The reality is that volatility in trade policy, which impacts economic outlook, remains simply too high, and the Bank of Canada will need to continue taking their rate decision one at a time, taking into account constantly shifting dynamics across jobs, prices, and financial markets.”
She added, “As the policy rate inches closer to neutral, we expect a rate cut in June. As recession risks rise, concerns about growth would outweigh those about inflation.”
Shannon Terrell, financial expert at NerdWallet Canada, said the rate hold “while frustrating for borrowers, drives home the reality of the Bank’s precarious balancing act.”
She said, “Inflation may sit at a gentle simmer for now, but the heat of prolonged tariffs has already begun to rise. If anything, Canadians should take heart in the Bank’s commitment to caution over risk. There are no easy answers in the midst of a tariff war.”
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