Interest rate holds steady

Photo: The Canadian Press
Tiff Macklem gets ready to make his rate cut announcement on Wednesday.

OTTAWA — The Bank of Canada doesn’t know quite yet how to navigate monetary policy amid constantly shifting trade turbulence with the United States, so the central bank kept its powder dry with an interest rate hold on Wednesday.

The central bank held its policy rate steady at 2.75%, the first time it has left the key rate unchanged following seven consecutive cuts since June.

Bank of Canada governor Tiff Macklem made clear that the trade disruption from south of the border was the clear focus of the decision.

“The dramatic protectionist shift in U.S. trade policy and the chaotic delivery have increased uncertainty, roiled financial markets, diminished global growth prospects and raised inflation expectations,” he said at a press conference.

Macklem said the central bank weighed a hold and a cut in its latest decision, as it did at in March. Though tariffs have been imposed and since adjusted in between decisions, he said the outcome of the dispute is still uncertain.

“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,” he said.

The Bank of Canada raises the policy rate when central bankers fear inflation could accelerate and lower it when they want to stimulate economic growth.

But both scenarios are in play right now amid what Macklem called “considerable uncertainty” tied to the United States’ global tariff campaign.

“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,” Macklem said.

Randall Bartlett, deputy chief economist at Desjardins, said the central bank knew that both the economy and inflation were tracking hotter than initially expected in the first quarter of the year, giving enough justification for a rate pause and offering the flexibility for a return to cuts if needed.

“The bank decided to keep its powder dry, just in case it needs to provide that additional support in the case of a downside scenario or doesn’t need that additional support in case we get a continued resolution of the trade tensions,” he said.

The Bank of Canada’s decision makers are not focused on one likely path forward and are instead preparing for a range of possible outcomes, Macklem said, not unlike many Canadians trying to plan their own finances in an uncertain time.

The central bank outlined a pair of economic scenarios alongside the rate decision that officials stressed should not be viewed as forecasts.

One would have the tariffs and threats negotiated away quickly and the economy stall, but escape with limited damage. Inflation would ease to 1.5% for most of the year—largely thanks to the elimination of the consumer carbon price—before rising back to the central bank’s 2% target.

The other example envisions a more protracted global trade war that sends Canada into a year-long recession, an outcome that Macklem said would be an “unprecedented shock” to the Canadian economy.

This scenario assumes the United States imposes tariffs of 12% on all Canadian goods with a higher 25% on motor vehicles and parts and another 25% import tax applied globally; Canada also responds here with similar tariffs on a selection of U.S. goods.

Canadian real gross domestic product contracts in this projection for four consecutive quarters, averaging declines of 1.2%, and the U.S. tariffs “permanently reduce Canada’s potential output and its standard of living,” the report reads.

That outcome also sees inflation rise, topping 3% in 2026, making the Bank of Canada’s job that much harder.

The central bank noted these two scenarios represent only a slice of the many possible outcomes. But the governing council used this double-barrelled framework to make its latest interest rate decision, attempting to set monetary policy that would best suit either outcome—in this case, a rate hold.