Bank of Canada holds interest rate at 2.75%, says trade war could cause a recession | CBC News (2025)

Thomson Reuters

· Posted: Apr 16, 2025 9:53 AM EDT | Last Updated: April 16

The Bank of Canada on Wednesdayheld its key policy rate at 2.75 per cent, its first pause after sevenconsecutive cuts, and said the uncertainty around U.S. tariffsmade it impossible to issue regular economic forecasts.

Instead, the central bank produced two scenarios on what could happen, including one that predicted a deep recession in Canada and a spike in inflation.

Governor Tiff Macklem said the bank — which began cutting last June — had kept interest rates on hold as it gained more information on the impact of tariffs and would proceed carefully.

"A lot has happened since our March decision five weeks ago, but the future is really no clearer. We still do not know what tariffs will be imposed, whether they'll be reduced or escalatedand how long all of this will last," Macklem said in his opening remarks after therates decision was announced.

"That means being less forward-looking than usual until the situation is clearer."

The bank's monetary policy would ensure inflation remained under control and would support economic growth, Macklem said.

Economists construed the governor's commentary as anindication that the bank's current pause was not an end to theeasing cycle and that it would jump in to support the economy ifneeded.

"He's clearly laid open the possibility of getting a lotmore aggressive if the economy deteriorates substantially," Douglas Porter, chief economist at BMO Capital Markets, said.

Andrew Kelvin, head of Canadian and global ratesstrategy atTD Securities, said that going forward, the weakness isexpected to pile up in the economy and that would force the bankto cut rates again.

WATCH |Bank of Canada holds overnight interest rate at 2.75%:

In the near term, the central bankexpects second-quarter GDP to be much weaker, after a 1.8 per cent growth forecast for the first quarter. Inflation is seen dipping to about 1.5 per cent in April, mainly due to the removal of carbon taxes and lower crude prices.

The central bank said it was difficult to predict the path of the economy for the long term.

"Forecasts for economic growth are of little use as a guide to anything," Macklem said.

Two possible scenarios

For the first time since the COVID-19 pandemic, the Bank of Canadascrapped the economic forecasts it gives in a quarterly monetary policy report. It instead offered two possible scenarios.

The first scenario assumes most of the tariffs are eventually withdrawn through negotiations, which would stall GDP in the second quarter. The economy then expands moderately, while inflation sinks to 1.5 per cent before returning to the two per cent target.

In the second scenario, the bank assumes the tariffs spark a long-lasting global trade war. In this case, the Canadian economy goes into a significant recession for a year, while inflation spikes to 3.5 per cent in mid-2026.

Macklem said under this scenario, U.S. tariffs would permanently reduce Canada's potential output and lower the country's standard of living.

This kind of outcome would be "painful" for Canada, hesaid in a press conference following the announcement. Some exporters could go bankrupt, unemployment would riseand Canadians might have to cut back on their spending under that second scenario.

Macklem added that if the incoming information points clearly in either direction, the bank isready to act decisively.

The governor also said these scenarios were two possibilities and they don't span the possible outcomes."The message here iswe have got to be flexible andadaptable," he said.

Canada's economy, which had been teetering for most of last year, found its footing as 2024 was ending.

But U.S. President Donald Trump's decision to unilaterally slap a barrage of tariffs on Canada and Mexico, followed by the rest of the world, hasdented business investments and consumer spending.

This is evident in the recent hard data thatshowed lack of job growth, elevated inflation and weaker economic growth.

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