Despite significant geopolitical tensions, the Bank of Canada announced today that it is keeping its benchmark interest rate at 2.75%, unchanged from March 2025. This ends a string of seven rate cuts dating back to June 2024.
Below, we summarize the Bank’s observations and its outlook.
Canadian Economic Performance and Wages
- The Canadian economy is slowing as tariff announcements and uncertainty pull down 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 with a decline in employment in March and businesses reporting plans to slow their hiring
- Wage growth continues to show signs of moderation
Canadian Inflation and Outlook
- Inflation was 2.3% in March, lower than in February but still higher than 1.8% at the time of the Bank’s January Monetary Policy Report
- Higher inflation in the last couple of months reflects some rebound in goods’ price inflation and the end of the temporary suspension of the GST/HST
- Starting in April, CPI inflation will be pulled down for one year by the removal of the consumer carbon tax
- Lower global oil prices will also dampen inflation in the near term; however, the BoC expects tariffs and supply chain disruptions to push up some prices
- How much upward pressure this puts on inflation will depend on the evolution of tariffs and how quickly businesses pass on higher costs to consumers
- Short-term inflation expectations have moved up, as businesses and consumers anticipate higher costs from trade conflict and supply disruptions
- Longer-term inflation expectations are little changed
Global Economic Performance
- Global economic growth was solid in late 2024 and inflation has been easing towards central bank targets, however, tariffs and uncertainty have weakened the outlook
- In the United States, the economy is showing signs of slowing amid rising policy uncertainty and rapidly deteriorating sentiment, while inflation expectations have risen
- In the euro area, growth has been modest in early 2025, with continued weakness in the manufacturing sector
- China’s economy was strong at the end of 2024 but more recent data shows it slowing modestly
Tariff Impacts on Financial Markets, Oil Prices and F/X
The BoC made a point of noting that financial markets have been “roiled” by serial tariff announcements, postponements and continued threats of escalation. This extreme market volatility is adding to uncertainty. Oil prices have declined substantially since January, mainly reflecting weaker prospects for global growth. Canada’s exchange rate has recently appreciated as a result of broad US dollar weakness.
An Uncertain Outlook
The Bank noted that 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. This “pervasive uncertainty” makes it unusually challenging to project GDP growth and inflation in Canada and globally.
Instead, the Bank’s April Monetary Policy Report presents two scenarios that explore different paths for US trade policy. In the first scenario, uncertainty is high but tariffs are limited in scope. Canadian growth weakens temporarily, and inflation remains around the 2% target. In the second scenario, a protracted trade war causes Canada’s economy to fall into recession this year and inflation rises temporarily above 3% next year. The BoC noted however, that “many other trade policy scenarios” are possible and that there is also an unusual degree of uncertainty about the economic outcomes within any scenario, “since the magnitude and speed of the shift in US trade policy are unprecedented.”
As a result, the Bank’s Governing Council will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. Its focus will be on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. This means the Bank will support economic growth while ensuring that inflation remains “well controlled.”
Governing Council also noted that it will proceed carefully, with particular attention to the risks and uncertainties facing the Canadian economy. These 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.
Final comments
The Bank once again noted the limitations of monetary policy, saying it “cannot resolve trade uncertainty or offset the impacts of a trade war. What it can and must do is maintain price stability for Canadians.”
More scheduled BoC news
The Bank is scheduled to make its fourth policy interest rate decision of 2025 on June 4th. First National’s executive summary will follow that announcement. In the meantime, please visit the Resources page of this website for other important insights.