The Bank of Canada announced on April 16, 2025, that it is maintaining its target overnight rate at 2.75%. This decision marks a pause after seven consecutive cuts since June of the previous year. The official discount rate remains at 3%, while the rate of remuneration on deposits is set at 2.70%.
Governor Tiff Macklem stated that the significant shift in U.S. trade policy and the unpredictability surrounding tariffs have increased uncertainty, moderated economic growth prospects, and raised inflation expectations. He emphasized that it is exceptionally difficult to project GDP growth and inflation in Canada and globally due to this generalized uncertainty.
In its April Monetary Policy Report, the Bank of Canada presented two scenarios regarding the trajectory of U.S. trade policy. In the first scenario, while uncertainty is high, the scope of tariffs is limited, resulting in a temporary weakening of growth in Canada, with inflation remaining around the target of 2%. Conversely, the second scenario predicts that a prolonged trade war could plunge the Canadian economy into recession this year, with inflation temporarily rising above 3% in 2026.
The global economy showed solid performance at the end of 2024, with inflation declining and approaching central bank targets. However, the imposition of tariffs and ongoing uncertainty have clouded the outlook. In the United States, signs of economic slowing are becoming evident amid increasing policy uncertainty and declining consumer confidence, leading to higher inflation expectations.
In the Eurozone, growth was modest in early 2025, largely due to persistent weakness in the manufacturing sector. Meanwhile, China's economy, which was strong at the end of 2024, has recently shown signs of a slight slowdown. Financial markets have been disrupted by tariff announcements and delays, adding to the prevailing uncertainty.
Oil prices have significantly decreased since January, primarily due to deteriorating global growth prospects. The Canadian dollar has recently appreciated, driven by the weakness of the U.S. dollar. However, the Canadian economy has slowed, with recent tariff announcements and uncertainty weighing heavily on consumer and business confidence.
Data indicates that consumption, residential investment, and business spending have decreased in the first quarter of 2025. Trade tensions are also hindering labor market recovery, as employment declined in March, and businesses reported plans to hire less. Wage growth continues to show signs of moderation.
Inflation stood at 2.3% in March, which is lower than in February but higher than the 1.8% observed at the time of the January report. The stronger inflation in recent months has been attributed to a rebound in goods prices and the conclusion of the GST and HST holiday. Starting in April 2025, inflation measured by the Consumer Price Index (CPI) will be pulled down for one year due to the removal of the carbon tax for consumers.
In the short term, the decline in global oil prices is expected to moderate inflation, but tariffs and supply chain disruptions are likely to raise some prices. The extent of upward pressure on inflation will depend on the evolution of tariffs and how quickly businesses pass on cost increases to consumers.
Short-term inflation expectations have risen, with businesses and consumers anticipating higher costs due to the ongoing trade conflict and supply disruptions. Long-term inflation expectations, however, have remained relatively stable.
The next date for setting the target overnight rate will be on June 4, 2025. As the Bank of Canada navigates these turbulent waters, it remains committed to controlling inflation while carefully considering the impacts of external factors.
In summary, the Bank of Canada’s decision to hold its key interest rate steady reflects a cautious approach amid significant uncertainty in global trade dynamics. As the situation evolves, the central bank is poised to adjust its policies to safeguard the Canadian economy against potential downturns.
