Bank of Canada Governor Tiff Macklem speaks at a news conference about the central bank's interest rate decision in Ottawa on April 16.Justin Tang/The Canadian Press
The Bank of Canada has hit pause on an almost year-long monetary policy-easing campaign, holding interest rates steady as it waits to gauge the damage caused by U.S. President Donald Trump’s erratic and destabilizing trade war.
The central bank’s governing council decided to leave the benchmark policy rate unchanged at 2.75 per cent on Wednesday. This follows seven consecutive cuts, which have lowered mortgage rates and other Canadian borrowing costs considerably since last summer.
The bank trimmed interest rates in January and March to fortify Canada’s trade-exposed economy in the face of U.S. tariff threats. This time around, policy-makers opted for a wait-and-see approach, giving the bank flexibility to respond to Mr. Trump’s ever-changing trade policy, but potentially putting it on a back foot if the Canadian economy deteriorates sharply.
“A lot has happened since our March decision five weeks ago. But the future is no clearer. We still do not know what tariffs will be imposed, whether they’ll be reduced or escalated, or how long all of this will last,” Bank of Canada Governor Tiff Macklem said in a press conference after the rate announcement.
Given the uncertainty, Mr. Macklem said the bank needs to “proceed carefully.” But he added that he and his team are “prepared to act decisively if incoming information points clearly in one direction.” The next rate decision is scheduled for June 4.
Mr. Trump’s tariff blitz has shaken the global economy, upended supply chains and roiled financial markets. It has also sowed confusion, as the President has flip-flopped repeatedly, imposing tariffs on Canada and other trading partners only to pause them, then threaten more.
The Bank of Canada decided to forgo its usual forecast in its quarterly Monetary Policy Report, published alongside the Wednesday rate announcement. Instead it outlined an upside and downside scenario for the Canadian economy and inflation, while emphasizing that a broad range of outcomes are possible.
The latest updates, news and analysis on the Bank of Canada's April interest rate decision
In the more optimistic scenario, most U.S. tariffs are dropped in the coming quarters, although uncertainty over the direction of U.S. economic policy remains. In this situation, GDP growth in Canada stalls in the second quarter, then begins to expand moderately. The rate of inflation drops to around 1.5 per cent for a year, before returning to the bank’s 2-per-cent target in 2026.
The second scenario is much darker. If Mr. Trump doubles down on his attacks on Canada and escalates his global trade war, the bank sees the Canadian economy entering a year-long recession starting in the second quarter, and suffering permanent scarring to the country’s potential output and standard of living. Inflation, meanwhile, rises above 3 per cent by mid-2026 as tariffs, countertariffs and supply-chain disruptions increase prices.
“To be blunt, some exporters could go bankrupt, that could spill through the economy. Unemployment could rise more. Household spending could retrench more. So yes, that is a risk,” Mr. Macklem said in the press conference, responding to a question about whether the downside scenario could be worse.
“There are also scenarios where this trade war ends relatively quickly, tariffs get negotiated away, the uncertainty goes away, and we look back and say, ‘Oh, that was really unpleasant, but it wasn’t a real crisis.’ So we’ll see.”
Opinion: The Bank of Canada was right to hold rates steady
The central bank faces a difficult balancing act. Trade wars are what economists call a “stagflation” shock: they constrain economic activity but also increase consumer prices, as companies pass higher costs along to their customers. That means there’s a trade-off for the central bank between supporting the economy with rate cuts, and controlling inflation by holding rates steady or increasing them.
U.S. Federal Reserve chair Jerome Powell made this point in a speech on Wednesday, noting that Mr. Trump’s trade war could create a “challenging scenario” for the Fed, where its dual mandates to control inflation and support maximum employment “are in tension.”
“If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close,” Mr. Powell told the Economic Club of Chicago.
By halting rate cuts on Wednesday, the Bank of Canada was sending a message that it remains focused on controlling inflation and trying to keep inflation expectations anchored, said Royce Mendes, head of macro strategy at Desjardins.
“If you sort of pause, take a break, both consumers and businesses don’t expect that any sort of uncertainty or threat to the economy will immediately warrant monetary easing,” Mr. Mendes said in an interview.
But choosing to stand pat while major Canadian industries – including automobiles, steel and aluminum – are hit with tariffs and consumer and business confidence crumples does come with risks.
“It could potentially leave them a bit further behind the curve come June or July. That’s why I think the debate ahead of either the June, or more so the July meeting, could be around whether to move rates lower by 25 or conduct a non-standard 50-basis-point cut to catch up with where monetary policy should have been,” Mr. Mendes said.
Financial markets are pricing in a roughly 50-per-cent chance that the bank resumes cutting at its next meeting in June. Traders see two more quarter-point cuts this year, which would take the policy rate to 2.25 per cent.
Some analysts think the bank will need to be more aggressive. Mr. Mendes sees four quarter-point cuts this year. Douglas Porter, chief economist at Bank of Montreal, has pencilled in three more quarter-point cuts.
“Our overriding view is that ultimately the downward pressure on growth from tariffs and trade uncertainty will override upward pressure on cost increases, especially with oil prices weak and the Canadian dollar on the mend,” Mr. Porter wrote in a note to clients.
The Canadian economy entered 2025 on a solid footing, with inflation back around the bank’s 2-per-cent target and economic activity perking up in response to the string of interest-rate cuts.
Recent data, however, suggest things are taking a turn for the worse. Consumer and business surveys show a sharp pullback in spending, hiring and investment intentions. The latest jobs numbers were weak. And the housing market has essentially stalled in major cities such as Toronto and Vancouver.
The number of homes sold in Canada in March was down 4.8 per cent from the previous month, and 9.3 per cent year-over-year – the worst March for home resales since the depths of the 2009 recession.
When asked during the press conference about the housing market, Senior Deputy Governor Carolyn Rogers focused on Toronto. The city is “probably being hit proportionately more than others by the degree of uncertainty around U.S. trade,” she said, as well as by the slowdown in population growth tied to changing immigration policy.
When it comes to inflation, the chief concern for the Bank of Canada, the outlook remains hazy. Trade disruptions push up prices, but recessions pump the brakes on inflation. Mr. Macklem said he’d be watching closely to see which one of these dynamics proves dominant in the coming quarters.
Headline Consumer Price Index inflation fell to 2.3 per cent in March from 2.6 per cent in February, although core inflation measures remain closer to 3 per cent. The central bank estimates that the end of the consumer carbon tax, combined with lower gasoline prices, should take headline inflation down to 1.5 per cent in April.
Looking further ahead, economists say, the path for inflation will depend on the evolution of the trade war – how much Ottawa retaliates with its own tariffs, what happens to the Canadian dollar, whether China reroutes goods to avoid U.S. tariffs – and how the Bank of Canada reacts as the data rolls in.