The decision reflects a cautious stance by the central bank, as it waits for more clarity on evolving U.S. trade policy and the potential impact of global tariffs.
The choice to hold the rate steady comes amid signs of economic weakness. Canada’s economy has slowed notably, with household spending and business investment showing signs of fatigue. Employment figures dipped in March, and forecasts suggest domestic demand will be flat through the first quarter of 2025. The Bank now expects GDP growth of just 1.8 per cent in Q1, with conditions anticipated to worsen in the second quarter.
This decision follows the release of softer-than-expected inflation data when uncertainty surrounding U.S. trade actions is dominating the economic outlook. Bank of Canada Governor Tiff Macklem characterised the current global trade situation as a “seismic shift”. He noted that forecasting inflation or growth with any precision has become increasingly difficult due to the unpredictable nature of tariffs.
The Bank has presented two potential scenarios in its latest monetary policy report. The first envisions successful trade negotiations and stable inflation. Consumer and business caution would still weigh on growth. The second scenario is far more severe, outlining a full-blown global trade war leading to a year-long recession. This scenario would also push inflation above three per cent. The Bank believes reality may lie somewhere between these two extremes, but acknowledges the situation could shift quickly.
Most economists expect the easing cycle to resume at the Bank’s next meeting in June. Analysts from major financial institutions, including CIBC, Desjardins, and BMO, have indicated that further rate cuts are likely. This is especially the case if economic data continues to deteriorate. A 25-basis-point cut is considered most probable in both June and July. Some believe a larger move could be warranted if inflation continues to fall and economic momentum weakens further.
Longer-term projections vary. Desjardins anticipates the overnight rate may fall to 1.75 per cent by the end of 2025, while TD expects a more modest path with total cuts of 50 basis points. BMO forecasts that the rate could drop just below the neutral range, which the Bank currently estimates to be between 2.25 and 3.25 per cent.
While the Bank of Canada has paused for now, the consensus is clear: Rate cuts are likely to return unless trade tensions ease swiftly.
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