The Bank of Canada is holding its key interest rate at 2.75 percent, warning that uncertainty around U.S. tariffs is diminishing Canada’s economic growth prospects and raising inflation expectations.
“The path for U.S. trade policy remains highly unpredictable. There is also considerable uncertainty about the impacts of a trade war on our economy,” Bank of Canada Governor Tiff Macklem said in his opening remarks on April 16.
Macklem said given U.S. President Donald Trump’s decision-making around tariffs, the bank decided to hold its policy rate unchanged in order to “gain more information about both the path forward for U.S. tariffs and their impacts.”
Trump had announced reciprocal tariffs on nearly every country on April 2, which sent stock markets around the world tumbling. But on April 9, he announced a 90-day pause on most reciprocal tariffs, except China, which had its tariffs raised to 145 percent.
The United States has also placed 25 percent tariffs on Canada, with a carve-out for goods compliant with the United States-Mexico-Canada Agreement, as well as similar tariffs on steel, aluminum, and automobiles.
The Bank of Canada said global economic growth has been slowing given the tariff uncertainty, with inflation expectations rising and growth slowing in the United States. The Canadian economy is slowing as consumer confidence declines, overall spending decreases, and businesses report plans to cut back on hiring.
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March’s inflation rate also came in a bit higher at 2.3 percent, which the bank attributed to the end of the federal government’s temporary two-month suspension of the GST. The lowering of the federal carbon tax to zero in March is also expected to pull inflation down by around 0.7 percent for a year beginning in April.
The central bank expects tariffs and the accompanying supply chain disruptions will also push up prices for some goods, but said the exact increases will depend on how the tariffs play out and how quickly businesses pass on higher costs to their customers.
Macklem said a protracted trade war with the United States would put upward pressure on inflation, while Canada’s weaker economy would also put downward pressure on inflation, making accurate forecasting of where inflation will go “especially difficult at this time.” He said the bank will pay close attention to numerous factors to decide how to proceed with its monetary policy.
“Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war,” Macklem warned. “What we can and must do is ensure that Canadians continue to have confidence in price stability.”
Two Illustrative Scenarios For US Tariffs
The Bank of Canada also released its Monetary Policy Report for April, which outlined two illustrative scenarios on how U.S. trade policies could play out.
In the first scenario, most tariffs imposed since the beginning of the trade war are “negotiated away,” but trade policy uncertainty remains until the end of 2026 and business and household demand are thus weakened. The United States keeps its 25 percent tariffs on steel and aluminum, and Canada maintains $29.8 billion of reciprocal tariffs on the U.S., while the U.S. also keeps 10 percent tariffs on China.
In this scenario, Canada’s GDP “stalls briefly” in the second quarter of 2025 and then expands at a moderate pace, allowing inflation to drop below the bank’s target rate of 2 percent for the remainder of 2025 and early 2026. Canada’s GDP growth then comes in at an average of 1.6 percent for 2026. The United States would see its GDP growth weaken from 2.8 percent in 2024 to 2 percent in 2025, while inflation would continue to trend downward and return to 2 percent by 2027.
In the second scenario, the U.S. tariffs remain and additional ones are added. The United States imposes 25 percent tariffs on goods imported from all countries, 12 percent on goods from Canada and Mexico, and 25 percent tariffs on motor vehicles and parts, while Canada imposes 12 percent tariffs on $115 billion of U.S. goods.
In this scenario, Canada’s trade is “drastically” reduced and exports fall until the middle of 2026 as Canada attempts to find new export markets. Canadian exporters lay off workers and reduce production, unemployment rises, real incomes drop, and the country enters a recession in the middle of 2025. Inflation also rises in this scenario to above 3 percent in early 2026 before returning to the 2 percent target by 2027.
The second scenario would also see the United States enter a recession in 2025, with inflation rising to 3 percent toward the end of that year.
