The Bank of Canada kept its key interest rate at 2.75% for the third straight quarter on Wednesday, as expected, and said the risk of a severe and escalating global trade war has now receded.
But for the second quarter in a row, the central bank declined to provide a detailed outlook for the Canadian economy, citing high uncertainty over U.S. trade policy.
The bank also said that if the economy weakens further, it is prepared to cut interest rates as long as inflationary pressures are contained.
While Canada is facing a range of tariffs in three sectors, the overall impact is manageable. The economy has shrunk only slightly, job growth has remained strong, and key indicators of core inflation have held steady.
The situation could change drastically by August 1, the deadline for the United States and Canada to reach a trade deal. U.S. President Donald Trump has threatened to impose 35% tariffs on some Canadian goods by that date.
The Bank of Canada previously cut rates by 225 basis points starting in June last year, and has been taking a wait-and-see approach since March to assess the impact of tariffs on the economy and prices.
“Since April, the risk of a global trade conflict escalating has receded,” according to the bank’s quarterly monetary policy report. “However, the direction of U.S. trade policy remains highly uncertain.”
Rather than issue an official forecast, the bank presented three different scenarios for possible developments.
The first scenario assumes that existing tariffs on steel, aluminum, automotive and goods that do not comply with the continental free trade agreement are maintained. In this case, GDP is expected to shrink by 1.5% in the second quarter of 2025 and grow by 1% in the second half before reaching 1.8% by 2027.
Headline inflation is expected to remain close to 2% over the next two years.
The other two scenarios project the impact of global tariffs being reduced or increased.
Lower tariffs are expected to improve growth prospects and reduce cost pressures on inflation. On the other hand, higher tariffs are expected to weaken the economy and increase cost pressures, Macklem said.
“We will monitor tariff developments closely and assess indicators of underlying inflation,” he added, stressing the central bank’s commitment to continue supporting economic growth while ensuring inflation remains contained.
“If the weak economy continues to weigh on inflation, and price pressures from trade disruptions remain contained, there may be a need to reduce the policy rate,” he said.
