The BOC held interest rates Wednesday following seven prior reductions citing the need for caution amid competing trade-war risks, and officials are prepared to take decisive action if needed to ensure inflation is under control or to fend off a recession.
"Governing Council will proceed carefully, with particular attention to the risks. That means being less forward-looking than usual until the situation is clearer. It also means we are prepared to act decisively if incoming information points clearly in one direction," Governor Tiff Macklem said in a statement. "Monetary policy will ensure inflation remains well controlled and support economic growth as Canada confronts this unwanted trade war."
Officials took the rare step of providing two economic scenarios rather than a regular forecast, focused on either a mild or a protracted global trade war. In the pessimistic case Canada faces a yearlong recession starting this quarter and the inflation rate rises above 3% around mid-2026. The economy stalls or contracts this quarter amid shifting tariff threats and short-term inflation expectations have climbed with some companies proactively raising prices, the Bank said.
Milder trade tensions also leave the Bank with competing risks, with inflation below the 2% target for the rest of this year and into 2026 and the economy posting modest growth. "Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war. What we can and must do is ensure that Canadians continue to have confidence in price stability," Macklem said.
Trump's actions remain volatile but his April 9 announcement scaling back some tariffs "have moved trade policy back towards the middle of the two scenarios" the Bank said.
Economists were split on whether the Bank would hold at 2.75% or cut the policy rate another quarter point, but investor forecasts were clearer on the idea borrowing costs will be reduced another two or three times later this year as the economy weakens.
While Canada has about the longest experience of investment and consumer confidence hurt by Donald Trump’s tariff threats, the BOC also cut rates the fastest in the G7 as inflation settled down last summer. With Canada avoiding the latest round of global reciprocal tariffs, monetary policy focus shifted back to borrowing costs at neutral and core inflation above 2%. The risk of a recession looms large, with many Canadian banks in recent weeks also penciling in a technical recession.
Canada sends three-quarters of its exports to the U.S. and those suppliers account for one in ten jobs. Small business confidence dropped farther and faster last month in response to the U.S. tariff war than during the Covid pandemic, the global financial crisis or 9-11 terrorist attacks. The CFIB Barometer also showed expected price increases over the next year quickening to 3.7% from the prior 3%.
It's not just monetary policy clouding the outlook. Federal leaders including Prime Minister and former BOC Governor Mark Carney are making un-costed promises of tariff relief. Some consumers are also being hit with expensive re-financings on five-year fixed-rate mortgages, and the government is slowing immigration that will curb potential economic growth. The Bank also mentioned the decision to eliminate the consumer carbon tax will cut the inflation rate by 0.7pp for one year.
The Bank made it clear tariffs are dominating monetary policy because of the ways it will drive inflation. Those include "the extent to which higher tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve."