Bank of Canada holds key interest rate steady at 2.75% amid U.S. trade uncertainty

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12:15 p.m.

What’s next?

– Mark Rendell

• The Bank of Canada’s next interest rate announcement is June 4. It will be a decision-only affair with no accompanying MPR.
• The bank will release its annual Financial Stability Report on May 8. Watch for discussions about recent moves in the bond market caused by chaotic U.S. policy, as well as any commentary about Canada’s housing market.
• The U.S. Federal Reserve’s next decision is on May 7. Financial markets expect the central bank to hold the Fed Funds rate steady in the range of 4.25 per cent to 4.5 per cent.
• Then, of course, you have the Canadian federal election on April 28. Whoever wins will be tasked with fortifying the Canadian economy for a trade war and negotiating with the mercurial U.S. President.

11:58 p.m.

Opinion: The Bank of Canada was right to hold rates steady

– Jeremy Kronick and Steve Ambler

We have argued over the last few months that the Bank of Canada needed to cut the overnight rate to at least get it back to the mid-point of the neutral rate range – where the economy is operating at potential and inflation is sustainably at the 2-per-cent target. The last cut to 2.75 per cent achieved that. With conflicting data and the on-again/off-again stance of the U.S. administration concerning tariffs, the bank was right to pause. Former Bank of Canada governor David Dodge recently said, “There is actually a great advantage to doing nothing.” We agree.

What were the arguments in favour of a cut? Most revolved around uncertainty and the effect this would have on consumer spending and business investment.

The Economic Policy Uncertainty index for Canada has reached stratospheric heights. It has averaged a value of 164 since 1985. However, since President Trump’s electoral victory and immediate threats toward Canada, this index has been on an upward trend. When the trade war began in earnest at his inauguration in January, the index hit a never-before-seen 883. By March, it had soared to 1,542 – more than nine times the historical average. We are in the realm of what economists refer to as “Knightian uncertainty” or, as Donald Rumsfeld once said, unknown unknowns.

All this uncertainty will cause consumers to think twice about spending, and businesses to hesitate to invest – an area of the Canadian economy that was already weak.

So, why not cut again? Uncertainty plays a role here, too.

Read the entire op-ed column here.

11:48 a.m.

Senior deputy governor Carolyn Rogers on the slowdown in the housing market

– Mark Rendell

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“In the Toronto area, we’ve seen a pretty big drop in housing activity. I think there’s a number of things going on there. There’s a fair bit of supply coming on, particularly in purpose-built rentals and condominiums. You’re seeing the effects of a change in population from the immigration policy. And then, of course, you’re probably seeing Toronto, Ontario is a market that’s probably being hit proportionately more than others by the degree of uncertainty around U.S. trade. So all those things, I think, are adding up to a pretty big impact, particularly in the Ontario and the Toronto area, on housing. You know, it’s one of the variables that we consider at every rate decision. Housing has had a sort of an outsized impact on our economy for a while. I think it’s been overtaken more recently by trade policies. So the fact that you’re not hearing us talk about it as much is really just a reflection of our focus now on the same thing Canadians are focused on, which is the effects of trade policy on the economy.”

11:41 a.m.

Macklem on the potential for a big downside scenario

– Mark Rendell

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“There’s also a fair degree of uncertainty about the effects of particularly Scenario 2, where you get really a historically unprecedented, escalating trade war. We’ve calibrated the response: I would call it a serious recession. It’s a four-quarter recession. It’ll be painful. We’ve calibrated that response, over the sort of historical sensitivity of U.S. consumers to higher cost of Canadian exports. When you get a shock that’s really big, and outside of historical experience there is a potential that the response could be different than what we’ve seen. In particular, it could react more than in proportion. I mean, 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. There’s a reason that we have two scenarios. I mean, that is certainly a very bad outcome. 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.”

11:03 a.m.

Macklem, asked what it means when the central bank says it’s ready to ‘act decisively’

– Matt Lundy

“I would not over-rotate on the word decisively. It’s not a code word for anything. In using the word ‘decisively,” I was really trying to convey how we’re thinking about monetary policy through this period of uncertainty. So the point is that right now, the outlook is really clouded, and so we’re being less forward-looking than normal. We’re navigating carefully. If the situation becomes clear, we can become more forward looking. We can, as we usually do, go back to having a base-case economic projection, and then the focus of our monetary policy deliberations will be more about what’s the best monetary policy given that base case projection. So I use the words ‘proceed carefully’ and ‘act decisively’ to convey that we’re in a period of very elevated uncertainty. If that clears, we can be more forward looking again. And certainly, if the data is tilting clearly in one direction or the other, we can respond decisively.”

10:50 a.m.

Macklem on why the BoC didn’t cut rates

– Matt Lundy

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“A lot has happened in the last five weeks since our March policy decision, but really, the situation is no clearer. I mean, tariffs have been announced, they’ve been imposed, they’ve been retracted, they’ve been threatened again. So at this meeting, we decided to leave our policy rate unchanged while we wait for more information on what’s going to happen with U.S. tariffs. … Look, the message is we’re navigating carefully. Our goal is to ensure that Canadians stay confident in price stability.”

10:48 a.m.

For once, the central bank’s rate decision was largely irrelevant to the housing market

– Salmaan Farooqui

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Whether the Bank of Canada decided to cut its headline rate or hold was irrelevant for the Canadian real estate market, says John Pasalis, president of Realosophy Realty in Toronto.

That’s because consumer anxiety around U.S. President Donald Trump’s trade wars and the possibility of a recession is now the major factor that is holding Canadians back from buying a home.

“Quite frankly, even if they had cut, it wouldn’t impact housing too much. At the end of the day there’s too much uncertainty globally,” said Mr. Pasalis. “People aren’t rushing to buy a home in that environment, even if rates do drop significantly.”

It’s a notable change from just a few months ago, when analysts expected Canada’s real estate market to pick up in the spring once Bank of Canada rate cuts started to materialize.

A report by the Canadian Real Estate Association found that the number of homes sold in March dropped by 4.8 per cent month over month on a seasonally adjusted basis, the fewest for that month in 2009. It predicted a recession later this year, and said concern about job losses is leading homebuyers to retreat and anxious owners to sell.

Mr. Pasalis said the situation was even more severe in the Greater Toronto Area, where March sales were at their lowest in 30 years.

10:45 a.m.

Key quotes from Macklem’s opening statement

– Mark Rendell

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On trade uncertainty:

“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. At this meeting, we decided to hold our policy rate unchanged as we gain more information about both the path forward for U.S. tariffs and their impacts.”

On future rate decisions:

“Faced with pervasive uncertainty, Governing Council will proceed carefully, with particular attention to the risks. That means being less forward-looking than usual until the situation is clearer. It also means we are prepared to act decisively if incoming information points clearly in one direction.”

On the state of the Canadian economy:

Incoming data are increasingly pointing to a considerable slowing in business investment and household spending. After expanding 5.6% in the fourth quarter of 2024, final domestic demand is expected to be roughly flat in the first quarter of 2025. Supported by a pull-forward in exports to get ahead of tariffs, GDP growth in the first quarter is forecast to be about 1.8 per cent. But with exports expected to decline, second-quarter growth will be much weaker.

In the labour market, job growth was picking up at the end of last year, but trade tensions are disrupting this recovery. Employment was flat in February, down in March, and many businesses report they are scaling back their hiring plans.

On the bank’s two scenarios:

In Scenario 1, we assume most of the new tariffs get negotiated away, but the process is unpredictable, and businesses and households remain cautious. GDP growth in this scenario stalls in the second quarter, then expands only moderately. Inflation drops below the 2% target for the rest of 2025 and into 2026, both because of the end of the consumer carbon tax and a weak economy.

In Scenario 2, we assume a long-lasting global trade war. The economic consequences are severe. Canada’s GDP contracts in the second quarter and the economy is in recession for a year. Growth gradually returns in 2026 but remains soft through 2027 as U.S. tariffs permanently reduce Canada’s potential output and lower our standard of living. Inflation rises above 3% in mid-2026 as tariffs, countermeasures and shifts in supply chains raise costs, pushing up many prices. Inflation then eases as weak demand limits ongoing inflationary pressures.

To be clear, these are only two of many possible scenarios, and even these do not span the possible outcomes.

On inflation:

The very near-term outlook for inflation is relatively clear. The elimination of the consumer carbon tax on April 1 will reduce CPI inflation by about 0.7 percentage points for one year. Lower global oil prices will also pull inflation down, so total CPI inflation is expected to be about 1.5 per cent in April …

What happens with inflation will depend importantly on what happens with tariffs. And if we find ourselves in a protracted trade war, we will see opposing pressures on inflation. A weaker economy will put downward pressure on inflation and higher costs from tariffs will put upward pressure. Both the uncertainty about tariffs and their opposing forces on inflation make forecasting inflation especially difficult at this time.

10:43 a.m.

BoC lays out two ‘illustrative scenarios’ for next couple years

– Matt Lundy

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At this point, central banks can’t possibly forecast the economic outlook, because of the erratic trade policies of U.S. President Donald Trump.

So on Wednesday, the Bank of Canada laid out two “illustrative scenarios” for the next couple years.

In the more optimistic scenario, most of the new tariffs are negotiated away. Gross domestic product growth stalls in the second quarter, “then expands only moderately.”

In the more pessimistic scenario, there’s a full-blown trade war that sends Canada into a year-long recession and inflation jumps above 3 per cent in mid-2026.

The Bank of Canada’s assessment is that trade policy has moved “back towards the middle of the two scenarios,” citing the rollback on country-by-country tariffs and recent exemptions granted to tech shipments from China.

But has the situation really improved that much?

Even with recent concessions, the U.S. is applying tariffs at the highest rates in a century. Most of the world is getting hit with a 10-per-cent duty. There are 25-per-cent sectoral duties on steel, aluminum and autos, with more promised for copper, pharmaceuticals and so on.

So yes, the situation has improved, relative to the morning of April 9, when countries like Cambodia and Bangladesh were getting slammed with steep tariffs.

What remains is a deeply protectionist United States, leaving consumers and businesses just as freaked out as they were in the global financial crisis – maybe worse.

Canada has a unique vantage point, relative to the U.S.’s other trading partners. We’ve already gone through the dance of threatened tariffs, a one-month pause, tariffs taking effect, partial exemptions and so on.

Are we living the worst-case scenario? No. But the economic outlook is still incredibly bleak, with the lingering threat that things can get worse.

10:40 a.m.

Economists react to today’s BoC decision

– Darcy Keith

How economists are reacting:

James Orlando, director and senior economist, TD Economics

“In reading the interest rate announcement and MPR, one would have thought the BoC decided to cut rates today. It highlighted the downside risks to the economy, with both scenarios showing a level of weakness that is deserving of further rate cuts. And it’s not just hypotheticals and sentiment surveys showing fragility. The real estate market has rolled over as Canadians grow more hesitant. This is also coming through in retail sales, while the March jobs report showed that firms are already trimming their workforce. Inflation also eased last month, which opened the door for rate cuts today, but the BoC decided not to walk through it.”

Market predictions for about 50 basis points in cuts over the remainder of this year “makes sense to us. Canada may have received a lower effective tariff rate than other countries, but the damage has already been done. Canada’s economy has started to show signs of weakness, which we think will continue over the coming months. This means the BoC should resume cutting rates at its next meeting on June 4th.”

Stephen Brown, deputy chief North America economist, Capital Economics

“The Bank of Canada’s decision to keep interest rates unchanged at 2.75% today was not a huge surprise given recent above-target gains in core prices, concerns about future price increases and uncertainty about the extent to which the economy requires additional policy support in the face of ever-changing trade policy. Nonetheless, the Bank’s communications were mostly dovish, which lends some support to our view that it will eventually cut interest rates to 2.0% this year, rather than pause at 2.25% as market pricing implies.”

Avery Shenfeld, chief economist of CIBC World Markets Inc

“One hawkish development is that the Bank sees the current output gap as only 0 to -1%, but a zero or tiny gap is, in our view, inconsistent with the elevated level of unemployment. If, as we expect, data from here to the June meeting provides early signs of a contraction of GDP in Q2, thereby widening the output gap, the Bank will feel more pressure to respond with a rate cut at that time. So we see this as a pause, one tied to the Bank’s lack of clarity on the outlook ahead, rather than the end of the easing cycle, unless the tariff threat disappears in short order.”

10:17 a.m.

Opinion: What it means to choose a variable-rate mortgage right now

– Rob Carrick

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Choosing a variable-rate mortgage right now is a bet on economic disruption.

The decision by the Bank of Canada to leave rates alone highlights the lack of urgency right now to keep cutting borrowing costs. The only way rates go lower from here is if the economy tanks in the trade war.

Discounted rates on variable-rate mortgages in mid-April were in the area of 4.25 per cent, compared with as little as 4 per cent to 4.25 per cent for five-year fixed rate mortgages. If minimizing your borrowing costs is a goal, then variable-rate mortgages only work if the Bank of Canada makes further cuts in its benchmark overnight rate.

A setback for the economy caused by the trade war would put pressure on the bank to cut rates. But there’s a complication in the form of inflation. Price increases caused by the trade war might forestall rate cuts, or even apply pressure for a rate hike.

If your pulse is rising as you try to process all of this, consider the serenity of the five-year fixed mortgage. Rates are not fantastic right now by historical standards, but you get five years of not worrying about mortgage rates.

Feel like five years is too long to commit to a mortgage at 4 per cent or a bit more? You can get a three-year fixed rate mortgage at pretty much the same cost right now.

Fixed-rate mortgages take their cue more from what’s happening with rates in the bond market than anything the Bank of Canada does. Bond yields have been up and down lately, with no clear trend emerging. Lenders would want to see a steady decline in bond yields before cutting their fixed mortgage rates.

10:15 a.m.

Markets react to BoC decision to hold rate steady

– Darcy Keith

The Canadian dollar shot back up to the 72 US cents level as the Bank of Canada announced its decision to keep rates on hold, a nearly quarter-cent move in the currency. Short-term bond yields rose marginally, with the two-year Canada yield - quite sensitive to changes in the bank’s overnight rate - rising a couple of basis points.

The message here is that markets weren’t particularly surprised by the decision, but there was a noticeable reaction at trading desks given opinions were pretty evenly split as to whether or not today would bring a change in the BoC’s key lending rate.

The continuing uncertainty over tariffs and who will form the next government have made it difficult for money markets to price in what comes next for monetary policy.

Following the BoC decision, implied probabilities in overnight swaps markets suggest it will come down to a coin toss as to whether a quarter-percentage-point cut will be made at the bank’s next policy meeting on June 4, according to LSEG data. However, by the end of this year, markets are still pricing in almost one half of a percentage point of easing.

9:45 a.m.

Bank of Canada holds policy rate at 2.75%

– Mark Rendell

The Bank of Canada held interest rates steady on Wednesday, pausing its easing campaign amid massive uncertainty caused by U.S. President Donald Trump’s erratic and destabilizing trade war.

The central bank’s governing council voted to hold the policy rate at 2.75 per cent. This follows seven consecutive rate cuts, which have lowered Canadian borrowing costs considerably since last summer.

Governor Tiff Macklem said the bank hit pause to give itself time to assess the fallout from Mr. Trump’s attempt to remake the North American economy and global trading system. Since returning to office in January, the President has imposed crippling tariffs on Canada and other trading partners, suspended them and announced more, upending supply chains and roiling financial markets.

“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,” Mr. Macklem said, according to the text of his press conference opening remarks.

“We decided to hold our policy rate unchanged as we gain more information about both the path forward for U.S. tariffs and their impacts.”

While the bank halted its easing campaign, Mr. Macklem said that he and his team are “prepared to act decisively if incoming information points clearly in one direction.” That suggests the bank could resume rate cuts in the coming months if the trade war escalates and the Canadian economy deteriorates further.

Read more about today’s Bank of Canada interest rate decision.

9:20 a.m.

Bank of Canada may forgo central forecast in report

– Mark Rendell

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The Bank of Canada may forgo a central forecast when it releases its quarterly Monetary Policy Report on Wednesday, something that last occurred in the opening months of the COVID-19 pandemic.

The bank usually publishes a base-case forecast for GDP growth and inflation in its MPR, allowing markets to understand where central bankers think the Canadian economy is heading.

U.S. President Donald Trump’s on-again, off-again tariff threats, however, have made economic forecasting almost impossible. Canada could be in a recession in the coming months, or it could be posting solid growth. A lot turns on changeable U.S. trade policy.

This uncertainty has prompted the Bank of Canada to adopt a new monetary policy playbook, which puts less emphasis on a central forecast when deciding how to set interest rates.

“If we were to guess where the economy is heading and make policy to optimize that outcome, we’d risk getting it wrong. Our actions could be ineffective or even make the outcome worse,” Governor Tiff Macklem said in a speech last month.

He suggested the bank may publish several possible scenarios in its MPR rather than a main forecast. The bank did this in its April 2020 MPR when uncertainty created by the COVID-19 pandemic made economic forecasting extremely difficult. Instead, the bank outlined upside and downside scenarios for the Canadian economy, contingent on the trajectory of the health crisis and lockdown measures, while emphasizing the broad range of possible outcomes.

8:45 a.m.

Canadian inflation surprisingly eases ahead of coin-toss Bank of Canada rate decision

– Matt Lundy

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Canada’s inflation rate surprisingly cooled in March as travel-related prices fell during the month, setting up a hotly debated Bank of Canada interest rate decision that is clouded by the trade war.

The consumer price index (CPI) rose 2.3 per cent in March from a year earlier, down from 2.6 per cent in February, Statistics Canada said on Tuesday. Financial analysts had expected higher inflation of 2.7 per cent, because of upward pressure from the end of the federal tax holiday in mid-February.

Consumer prices rose 0.3 per cent on a monthly basis, lagging way behind estimates of a 0.7-per-cent gain.

Inflation has largely resided near the Bank of Canada’s 2-per-cent target since last summer, allowing the central bank to cut rates at seven consecutive meetings.

But the bank’s next rate decision, is hardly certain, because of the fallout from the global trade war launched by U.S. President Donald Trump. American trade policies, which often change by the day, are making it near impossible for central bankers to forecast the economic outlook.

Tuesday’s inflation report showed a cool-down on several fronts. Gasoline prices fell 1.8 per cent in March from February. Excluding gas, the CPI rose 2.5 per cent on an annual basis, down from 2.6 per cent in February.

The removal of the federal consumer carbon price on April 1, combined with a drop in global oil prices, has led to a sizeable decline in gas prices this month that will put downward pressure on the April CPI numbers.

Travel prices, meanwhile, fell during the normally busy spring break period. Prices for travel tours dropped 8 per cent in March from February, while airfare prices tumbled 12 per cent from a year earlier.

The Bank of Canada’s preferred measures of core inflation – which strip out volatile movements in the CPI – also eased in March. On a three-month annualized basis, those measures rose by an average of 2.7 per cent in March, down from 3.3 per cent in February.

Read more about the latest CPI numbers.

8 a.m.

To pause or not to pause? Markets and analysts are split

– Mark Rendell

Most recent interest rate cuts have been “fully priced” by the market. Not this time around.

Interest rate swap markets, which capture expectations about monetary policy, put the odds of a pause at just under 60 per cent and the odds of another quarter-point cut at just above 40 per cent, according to LSEG data. That’s a much closer split than ahead of recent decisions, and suggests investors can’t make up their minds about which way the Bank of Canada will go.

Markets are pricing in two more quarter-point cuts from the central bank this year, which would take the policy rate to 2.25 per cent, but the timing is up for debate.

Analysts are equally divided. A Reuters poll of economists conducted last week found 18 expect the Bank of Canada to hold rates steady on Wednesday and 11 expect another quarter-point step down.

7 a.m.

Bank of Canada rate decision a close call amid trade uncertainty

– Mark Rendell

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For the first time in months, the Bank of Canada’s upcoming interest rate decision is a coin toss.

The governing council could cut its policy rate – most likely by a quarter-point to 2.5 per cent – to further fortify the Canadian economy for a trade war. Or it could pause its easing cycle after seven consecutive cuts to wait for more clarity about U.S. President Donald Trump’s erratic tariff agenda. Financial markets and analysts are split on the issue.

The bank delivered an “insurance” cut in March, trimming borrowing costs to boost business and consumer confidence in the face of U.S. tariffs. But Governor Tiff Macklem cautioned that further cuts weren’t guaranteed. Trade wars hurt economic activity but also push up prices. The central bank can’t let a tariff problem become an inflation problem, Mr. Macklem warned.

Mr. Trump has since taken his trade war global, but softened his threats against Canada. He placed levies on automobiles, steel and aluminum, but said that other Canadian and Mexican goods that comply with continental free trade agreement rules can continue to cross the border tariff-free. In short, the outlook for the U.S. and global economy has darkened over the past month, but Canada’s relative position in a changing trading order has improved.

Where this leaves the Bank of Canada is anyone’s guess. The latest inflation numbers, published on Tuesday, came in lower than expected. Headline inflation dropped to 2.3 per cent in March from 2.6 per cent in February, as a fall in gasoline and travel prices offset a rise in food prices that occurred as the GST holiday ended. Core inflation measures remained elevated, with the bank’s preferred metrics hovering close to 3 per cent.

Other economic data are mixed. Recent GDP readings have been better than expected, but jobs numbers have been weak and consumer and business confidence is in the dumps. Tariffs will weigh on economic activity in the coming quarters.

Amid all the uncertainty, Mr. Macklem said in a speech last month that the bank is putting less emphasis on economic forecasts and more emphasis on managing risks and being nimble. “We need to set policy that minimizes the risk. That means being less forward-looking than normal until the situation is clearer. And it may mean acting quickly when things crystallize,” he said.

We’ll find out what that means in practice at 9:45 a.m. ET.

Read more about today’s expected Bank of Canada decision.