Good morning. I’m here with Senior Deputy Governor Carolyn Rogers to discuss the latest policy announcement and the April Monetary Policy Report.
The Governing Council has maintained the policy interest rate at 2.75% following seven consecutive rate cuts. This decision follows a positive economic close to 2024 when inflation neared the 2% target and household spending increased. However, recent shifts in US trade policy have introduced uncertainty, destabilizing financial markets and leading to increased inflation expectations.
The unpredictability of US trade policy presents challenges, with unclear outcomes regarding tariffs. In January and March, in response to these threats, the Council reduced the policy interest rate by an additional 25 basis points. Despite these decisions, clarity remains elusive, and the Council opted to keep the rate unchanged in this meeting until more information is available.
“Our focus will be on assessing the downward pressure on inflation from a weaker economy and the upward pressure from higher costs. We will support economic growth while ensuring inflation remains well controlled.”
Incoming data suggests a slowdown in business investment and household spending is likely. After expanding in the last quarter of 2024, final domestic demand is expected to be stagnant during the first quarter of 2025. Although GDP growth is forecasted to be modestly positive due to export activity, it is expected to weaken by the second quarter.
Inflation dynamics in Canada have shown an increase from 1.8% in January to 2.3% in March due to the conclusion of GST/HST exemptions and other inflationary factors. Import prices have been rising following the depreciation of the Canadian dollar and in anticipation of future tariffs, contributing to rising short-term inflation expectations. The removal of the consumer carbon tax is projected to reduce CPI inflation modestly, aided by lower global oil prices.
Beyond the near-term, the Canadian economy’s trajectory largely depends on future US trade policy, prompting the April Monetary Policy Report to illustrate two possible scenarios: 1) a rollback of tariffs but with cautious economic behavior, and 2) a prolonged trade war with adverse economic impacts.
In Scenario 1, cautious optimism emerges with modest economic recovery, while inflation briefly falls below the target. Scenario 2 involves severe downturns, persistent economic shocks, and elevated inflation due to sustained tariffs.
To address the ambiguity of the current environment, the Council considered potential consequences of tariffs which may vary in intensity and timing relative to the scenarios. They are prepared to act decisively if upcoming data provides clearer signals.
The evolving situation in the Canadian economy, including job market disruptions, GDP forecasts, and inflation movements, will continue to be under scrutiny. “Moving forward, we will pay close attention to the risks and uncertainties to the Canadian economy and inflation.”
Recent changes in US trade policy have further complicated financial conditions, leading to a volatile economic environment. The monetary policy framework aims to control inflation and support growth despite the challenges posed by this trade uncertainty.
With that, further questions can be addressed by myself and the Senior Deputy Governor.
