–Governor Macklem: To Remain Less Forward-Looking Than Usual ‘Until Situation Is Clearer’
–Mackem: Prepared to Act ‘Decisively’ If Information Points Clearly in One Direction
–Macklem: Governing Council Discussed Both Holding Rates Steady and Cutting by 25 Basis Points as in March
–Senior Deputy Governor Rogers: Some Are More Optimist about Trade Rows Being Resolved but There Is ‘Clear Consensus’ to Hold Rates
By Max Sato
(MaceNews) – The Bank of Canada on Wednesday maintained its policy interest rate – the target for overnight lending rates – at 2.75% as largely expected after seven straight rate cuts through March amid exceptionally high uncertainty over growth and inflation sparked by protectionist U.S. trade policy.
BOC officials remain cautious about predicting their next move, blaming the highly unpredictable nature of what President Donald Trump decides. The impacts of those decisions have already triggered “an unprecedented shock” unseen for more than 100 years, according to the governor.
The latest decision follows moderate 25-basis point rate cuts, in March and January, two consecutive 50-basis point slashes, in December and October, and three 25-basis point cuts since June when the bank began unwinding the effects of its past aggressive tightening.
“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,” the bank said in a statement. “Our focus will be on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. This means we will support economic growth while ensuring that inflation remains well controlled.”
“In March we said we would be less forward-looking and we would be proceeding carefully with further changes in our policy rate,” Governor Tiff Macklem told a news conference. “A lot has happened in the last five weeks since our March policy decision but the situation is no clearer: The tariffs have been announced, they’ve been imposed, they’ve been retracted and they’ve been threatened again.”
Macklem didn’t directly answer the question of whether it was a close call to hold rates on Wednesday but said, “We did much like we did last time.” One option was to leave the policy rate at 2.75% and the second one was to cut the rate by 25 basis points.
Senior Deputy Governor Carolyn Rogers told reporters that some members were more optimistic about how soon the trade conflicts would be resolved but stressed that there was “clear consensus” to hold.
Rogers was also asked about financial stability as the liquidity in the financial markets was slightly constrained for a while and yield spreads widened. “The market has absorbed a pretty big shift (in the U.S. trade policy) without a big dislocation,” she said.
Canadian financial institutions “are well capitalized” and “have some room to absorb this kind of volatility,” Rogers said but added: “We are definitely watching for signs that the short-term volatility starts to affect stability.”
In a nutshell, Macklem’s key message is: “We are navigating carefully. Our goal is to ensure that Canadians stay confident in price stability.”He also said another key message is: “We are going to do as much as we can to support the economy while maintaining our primary focus on price stability.”
Asked how to balance between the two goals, the governor said, “Our target is 2% inflation. We think about that symmetrically. We are just as worried about inflation above 2% as below 2%.”
While being less forward-looking than usual “until the situation is clearer,” the governor noted that “it also means we are prepared to act decisively if incoming information points clearly in one direction.”
Asked whether “acting decisively” means lowering interest rates by 50 basis points at a time or making policy decisions between the scheduled meetings, Macklem said, “I would not over-rotate on the word ‘decisively.’ It’s not a code word or anything. The outlook is really cloudy now, so we are less forward-looking than normal. We are navigating carefully.”
“We are in a period of very elevated uncertainty. If that clears, we can be more forward-looking again and certainly if the data is titling in one direction than the other, we can respond decisively,” he said without specifying what can be a decisive move.
If there are significant tariffs, there will be cost increases; the prices of many goods will go up, the governor said. “There is nothing we could do about that. What we are focused on is making sure that those first round price increases from the cost increases don’t spread to other prices and become ongoing inflation.”
In its quarterly Monetary Policy Report, the bank presented two illustrative scenarios for how U.S. trade policy could unfold, instead of focusing on a single, highly uncertain projection.
In Scenario 1, bank officials 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, they 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.
The only forecast provided is for the “very near-term” outlook for inflation: Total CPI inflation is expected to be about 1.5% in April, down from 2.3% in March. 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. The higher inflation in the last couple of months reflects some rebound in goods price inflation and the end of the temporary suspension of sales taxes.
So, what is the most likely scenario for the coming months? There are no clear projections from private-sector economists, either, as to roughly when the BOC may opt to cut rates.
“There’s not much sense parsing every word from the bank when the economic landscape can shift so abruptly in coming weeks, and the bank—like the rest of us—will be reacting and responding to those shifts,” BMO Chief Economist Douglas Porter wrote in a report.
“We believe that the deep trade uncertainty will weigh heavily on growth in Q2 and Q3, blunting inflation pressures, and eventually prompting the bank to trim rates further, ultimately taking them slightly below neutral—which would be entirely appropriate in a world of trade trauma.”
The bank has delivered a total 225 basis points (2.25 percentage points) in the current easing cycle. Previously, it raised the policy rate by a total of 475 basis points between March 2022 and July 2023, jacking up the key rate through 10 increases from its record low of 0.25% to a 22-year high of 5.0%.