The Bank of Canada has decided to maintain its overnight rate at 2.75%, continuing with the Bank Rate at 3% and the deposit rate at 2.70%. This action comes amidst increasing uncertainty in North American trade policies that are challenging to forecast.
Recent shifts in US trade policies and imposed tariffs have brought about heightened uncertainty, affecting economic growth and inflating concerns over future inflation. The Bank’s April Monetary Policy Report (MPR) outlines two potential scenarios: one where uncertainty is high but tariffs remain restricted, resulting in Canadian growth weakening temporarily and inflation hovering around the 2% target; and another where an extended trade conflict could lead to a recession in Canada this year with inflation surging past 3% next year.
The global economic scene was robust at the close of 2024, with inflation moving closer to central bank targets. However, the outlook has been downgraded due to tariff-related uncertainties. In the US, economic activity has been slowing down amidst rising policy uncertainties. Meanwhile, Europe’s growth has been moderate, and China’s economy has shown signs of a mild slowdown.
Financial markets have succumbed to volatility due to repeated tariff announcements, delays, and looming threats of escalation, further fueling uncertainty. A significant drop in oil prices since January has reflected the weakened global growth prospects, although Canada’s exchange rate has appreciated because of a broad weakening of the US dollar.
Domestically, Canada’s economy is displaying a downturn influenced by trade tensions and unpredictable market conditions. Confidence among consumers and businesses has been affected, resulting in softened consumption, residential investment, and business expenditures. Additionally, these trade tensions are hindering labor market recovery, as evidenced by a decline in March employment and reported plans by businesses to reduce hiring.
Inflation in Canada was recorded at 2.3% in March, slightly reduced from February’s figures, yet higher than the prior January MPR. This rise in inflation is partially due to a rebound in goods price inflation post the temporary suspension of GST/HST. Moving forward, consumer price index inflation is expected to decrease due to the temporary removal of the carbon tax. Lower global oil prices are anticipated to suppress inflation in the short term, but ongoing tariffs and supply chain issues could elevate some costs. Short-term inflation expectations have risen, reflecting anticipated higher costs from trade disagreements and supply interruptions. Meanwhile, long-term expectations remain largely unchanged.
The Bank’s Governing Council plans to continually evaluate the timing and intensity of inflationary pressures resulting from a weakened economy against those arising from higher costs. Their primary aim remains to uphold price stability for Canadians amid global uncertainty, while also facilitating economic growth.
The next announcement regarding the overnight rate target is scheduled for June 4, 2025, with the subsequent Monetary Policy Report to follow on July 30, 2025.
