Bank of Canada Holds Key Interest Rate Amid Rising Trade Uncertainty
The Bank of Canada announced today that it is holding its target for the overnight rate at 2.75%. The Bank Rate remains at 3%, and the deposit rate at 2.70%.
Mounting uncertainty from a sharp shift in U.S. trade policy and unpredictable tariff actions is weighing heavily on global economic outlooks. According to the Bank’s April Monetary Policy Report (MPR), this uncertainty complicates projections for GDP and inflation both domestically and globally. Instead of offering a single forecast, the Bank outlines two scenarios for U.S. trade policy:
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Scenario 1: High uncertainty with limited tariffs. Canada experiences a temporary slowdown, but inflation stays close to the 2% target.
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Scenario 2: A prolonged trade war pushes Canada into a recession in 2025, with inflation temporarily rising above 3% next year.
Numerous other trade scenarios remain possible, and the outcomes are particularly difficult to predict given the unprecedented nature of the shift in U.S. policy.
While global growth was strong in late 2024 and inflation has been moderating, new tariffs and policy unpredictability have dampened the outlook. The U.S. economy is now slowing, amid rising uncertainty and weakening business sentiment. In the eurozone, early 2025 has brought modest growth and continued industrial sluggishness. China’s economy, which ended 2024 on solid footing, is now showing early signs of slowing.
Financial markets have reacted sharply to ongoing tariff news, with volatility increasing investor unease. Oil prices have fallen significantly since January due to weaker global growth prospects. Meanwhile, the Canadian dollar has appreciated, largely due to a broad decline in the U.S. dollar.
In Canada, economic activity is slowing as trade tensions sap consumer and business confidence. Indicators suggest weakened consumption, residential investment, and business spending in Q1. Labour market recovery is also being disrupted, with employment falling in March and hiring intentions cooling. Wage growth is moderating.
Inflation stood at 2.3% in March—down from February but still above the 1.8% recorded in January. The recent rise reflects a rebound in goods prices and the expiry of a temporary GST/HST suspension. However, starting in April, inflation will be reduced for a year by the removal of the consumer carbon tax. Lower oil prices will also put downward pressure on prices, although tariffs and supply chain issues could drive some costs higher. The extent to which businesses pass these costs onto consumers remains uncertain. Short-term inflation expectations have increased, but long-term expectations remain stable.
The Bank’s Governing Council is closely monitoring both the downward forces on inflation from a slowing economy and the upward pressures from rising costs. The priority remains maintaining confidence in price stability while supporting economic growth.
Looking ahead, the Council will proceed cautiously, considering the many risks facing the Canadian economy. Key concerns include how tariffs affect exports, investment, employment, and spending; how quickly higher costs are passed on to consumers; and how inflation expectations evolve.
While monetary policy cannot resolve trade disputes or prevent a trade war, it remains committed to safeguarding price stability for Canadians.
