For the first time since last June, the Bank of Canada opted to leave interest rates unchanged, pointing to high uncertainty about the economic outlook brought about by US President Donald Trump’s trade war. This leaves the key overnight interest rate at 2.75%.
“The major shift in direction of US trade policy and the unpredictability of tariffs have increased uncertainty, diminished prospects for economic growth, and raised inflation expectations,” the Bank said in a statement. “Pervasive uncertainty makes it unusually challenging to project GDP growth and inflation in Canada and globally.”
Going into the meeting, the bond market pegged the central bank’s decision on interest rates as a coin toss between cutting and holding steady. Analysts pointed to the conflicting macroeconomic forces of the inflationary effects of tariffs and slowing economic growth. While a weaker-than-expected March Consumer Price Index report prompted some analysts to lean more toward continued monetary easing, others maintained their support for a cautionary pause to allow policymakers time until the tariff dust is settled.
This was the first pause after the Bank cut policy rates at seven consecutive meetings since it started its easing cycle last summer, which brought rates from 5.00% down to 2.75%.
The Canadian dollar reacted to the news by rising 0.44% to C$1.389 against the US dollar. Following the Bank’s announcement, bond yields ticked slightly higher across the curve.
Below are highlights from commentary on the Bank of Canada rate announcement, based on responses to Morningstar’s requests for comments and analyst notes to clients.
Charles St-Arnaud, chief economist at Alberta Central
“The overall message from the Bank of Canada is little changed compared to the March statement. As such, the Bank of Canada reiterates that ‘Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war.’ The Bank makes it clear that its primary focus going forward will be to assess the balance between the opposing impact of a trade war on inflation, with lower inflationary pressures coming from the weaker growth and the higher inflationary pressures coming from the uncertainty, tariffs and countertariffs, and supply chain disruptions.
“With this in mind, it would be a mistake to think the Bank of Canada will lean toward supporting the economy and allow inflation to move above the target. The recent inflationary episode has shown how disruptive high inflation can be to the Canadian economy, and the Bank of Canada is likely to avoid a repeat of a similar situation.
“Overall, we continue to believe that the general direction for interest rates is lower. However, the pace of easing is highly uncertain and will depend on US trade policies, the magnitude of the slowdown in the Canadian economy and the evolution of inflation, especially upside pressures. Nevertheless … lower population growth in 2025 and 2026 will be an important drag on the economy, pushing potential growth and the neutral rate lower. This means that at 2.75%, the current policy rate level will likely become restrictive later this year.”
Douglas Porter, chief economist at BMO Economics
“The market viewed the decision as a close call, but had been leaning to no move as well. The policy announcement focused mostly on the extreme degree of uncertainty in the outlook, with the Monetary Policy Report employing two potential scenarios (and admitting there are plenty of other possibilities). It’s tough to characterize the tone of the Bank’s stance, as it indicates that it both is ‘prepared to act decisively’ and yet ‘will proceed carefully and be less forward-looking than usual until the situation becomes clear.’ The point is that the Bank will mostly act reactively, which helps explain why it decided to hold today.
“Our overriding view is that ultimately the downward pressure on growth from tariffs and trade uncertainty will override upward pressure on cost increases, especially with oil prices weak and the Canadian dollar on the mend. We continue to look for three additional rate cuts this year as the Bank grows more comfortable with the inflation outlook, eventually taking the overnight rate down to 2.0%—a touch below the Bank’s latest estimate of neutral (they kept the range unchanged at 2.25%-3.25%).
“There’s not much sense parsing every word from the Bank when the economic landscape can shift so abruptly in coming weeks, and the Bank—like the rest of us—will be reacting and responding to those shifts. We believe that the deep trade uncertainty will weigh heavily on growth in Q2 and Q3, blunting inflation pressures, and eventually prompting the Bank to trim rates further, ultimately taking them slightly below neutral—which would be entirely appropriate in a world of trade trauma.”
Stephen Brown, deputy chief North America economist at Capital Economics
“The Bank of Canada’s decision to keep interest rates unchanged at 2.75% today was not a huge surprise given recent above-target gains in core prices, concerns about future price increases and uncertainty about the extent to which the economy requires additional policy support in the face of ever-changing trade policy. Nonetheless, the Bank’s communications were mostly dovish, which lends some support to our view that it will eventually cut interest rates to 2.0% this year, rather than pause at 2.25% as market pricing implies.
“The Bank did not provide forward guidance, instead noting that it will ‘proceed carefully’ while trying to balance the downside risks to the economy from US tariffs against ‘how quickly cost increases are passed on to consumer prices and how inflation expectations evolve’.
“… our sense is that the upside risks to inflation are lower than what the Bank might have thought just a week ago, with the March CPI data yesterday more favorable, oil prices showing little sign of picking back up, the loonie rebounding and the Canadian government granting various exemptions from its retaliatory tariffs on US imports. For now, the situation more closely resembles the scenario in which inflation just about remains under control, allowing the Bank to ease policy a little further over the rest of the year, including with another 25 basis points at the next meeting in June.”
Avery Shenfeld, senior economist at CIBC Economics
“The Bank of Canada opted to keep rates unchanged, with its messaging emphasizing the wide range of potential outcomes ahead for growth and inflation, and the press conference opening statement suggesting that the Bank was choosing to wait and see, in order to ‘gain more information’ about where things are headed. Rather than present a single forecast, the Monetary Policy Report outlined two divergent scenarios reflecting differing outcomes for US tariffs, with the more severe case showing a recession but also a temporary jump in inflation, and a second seeing only a brief stall in growth due to uncertainty, and inflation remaining in check. In both cases, inflation actually averages not far from the mid-point of the 1-3% range over the forecast horizon.
“But the Bank also states that these are only illustrative of a broader range of outcomes, and it’s likely that this uncertainty over its forecast was key in its decision to stand pat. The neutral rate was left unchanged with the range centered on 2.75%. One hawkish development is that the Bank sees the current output gap as only 0 to -1%, but a zero or tiny gap is, in our view, inconsistent with the elevated level of unemployment. If, as we expect, data from here to the June meeting provides early signs of a contraction of GDP in Q2, thereby widening the output gap, the Bank will feel more pressure to respond with a rate cut at that time.”
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“In the face of widespread uncertainty regarding the path for the Canadian economy and inflation, the Bank of Canada chose to pause its rate cutting cycle today. Despite a number of market participants looking for a cut, the decision was in line with our view and that of the majority of forecasters. The direction for the Canadian economy and inflation will be dependent on the evolution of US trade policy. The decision to hold rates steady today and only offer scenario-based analysis was well-telegraphed in recent Bank of Canada communications.
“Despite holding rates steady today, we see scope for officials to be debating whether they need to cut rates 50 basis points at their next scheduled rate decision in June should the de-escalation in trade tensions continue. That, however, doesn’t open up the possibility of inter-meeting cuts. Such moves are reserved for rapidly evolving situations such as financial crises or global pandemics. Trade wars tend to be slower moving, assuming financial markets remain orderly.
“The market has taken the Bank of Canada’s decision to hold rates steady in stride. Government of Canada bond yields are slightly higher following the announcement. However, given that the Bank of Canada had already reduced rates 225 basis points from their peak, more than any other G7 central bank, the pause is justifiable. We continue to forecast a terminal policy rate of 1.75% later this year.”
Jack Manley, global market strategist at JP Morgan Asset Management
“The Bank of Canada has long presented itself as a truly ‘data dependent’ central bank; today’s decision to hold rates steady is further evidence of this. This flexibility is structural – by not providing forward guidance (as the Fed does through its SEP), the Bank is not beholden to previous projections or market expectations. While market watchers may be frustrated by this, it is ultimately an asset for the Bank.
“[Governor Tiff] Macklem has accurately noted that the trade war is complex, with uncertainty about exemptions and timing and uncertainty around its impact on the economy – almost certainly damaging to growth, but with a mixed impact on inflation (shorter-term higher, longer-term lower). There is no clear playbook during a stagflationary environment.
“Still, past rhetoric (and actions) from the Bank of Canada, coupled with the Fed’s forward guidance a few weeks back, suggest that Macklem et al are willing to prioritize supporting the consumer and the labor market, even if it means stoking the flames of inflation for a bit. A pause in this scenario makes sense – rates will still likely move lower, but the pace will slow for now.”
Dustin Reid, chief strategist, fixed income at Mackenzie Investments
“We had believed the Bank of Canada would adopt a similar stance to its March decision, when it opted to cut rates even in the face of higher inflation on the notion of increased downside economic risks coming from tariff-related uncertainty. However, the Bank of Canada was more focused on upside inflation risks this time around. The Bank also opted to keep its estimate of the neutral range of interest unchanged at 2.25-3.25%.
“With both increased uncertainty around tariff risks, as well as likely slower US economic growth this year, we see on balance a Bank of Canada that will likely ease rates by at least another 25 to 50 basis points before year-end, getting the policy rate closer to what the Bank considers the bottom-end of its neutral range.”
Tony Stillo, director of Canada economics at Oxford Economics
“The Bank of Canada reiterated that while monetary policy can’t offset the impacts of a trade war, it must ensure inflation remains stable around its 2% target. The Bank intends to remain less forward-looking than usual and proceed cautiously amid ‘pervasive uncertainty’ as it tries to balance the negative hit to the economy from tariffs against higher prices, supply disruptions, and rising inflation expectations.
“The April Monetary Policy Report presents two scenarios for the economy: one assumes new tariffs are negotiated away, the Canadian economy avoids a recession, and inflation slows below 2%; and another assumes a lengthy trade war where current tariffs remain in place, the Canadian economy falls into a year-long recession, and inflation rises above 3%. Our April baseline forecast is much closer to the BoC’s second scenario.
“While we can’t entirely rule out a couple more 25 basis points rate cuts this year, we don’t think the Bank of Canada will reduce rates below 2.25% – the low end of its neutral range – at least until it gets more clarity on the path for trade and fiscal policy.”
Tu Nguyen, economist at RSM Canada
“This hold marks the first pause after seven consecutive cuts as inflation eased back to target and the economy began growing. There is no denying that the Bank places utmost importance on higher inflation outlook. US tariffs on Canadian imports came into effect in March and April on a wide range of products, from non-CUSMA compliant goods to steel and aluminum to autos. With those came Canada’s retaliatory actions. raising short-term inflation expectations among businesses.
“As the policy rate inches closer to neutral, we expect a rate cut in June. As recession risks rise, concerns about growth would outweigh those about inflation. … if tariffs are more sweeping, Canada would be in a truly difficult position with a recession plus higher prices. Already, the March’s jobs report with a loss of 66,000 full-time jobs underlines the brunt force of uncertainty on the Canadian economy. But lower consumer demand and purchasing power could offset some inflationary effects of tariffs.
“The reality is that volatility in trade policy, which impacts economic outlook, remains simply too high, and the Bank of Canada will need to continue taking their rate decision one at a time, taking into account constantly shifting dynamics across jobs, prices, and financial markets.”
James Orlando, director and senior economist at TD Bank
“In reading the interest rate announcement and MPR, one would have thought the Bank of Canada decided to cut rates today. It highlighted the downside risks to the economy, with both scenarios showing a level of weakness that is deserving of further rate cuts. And it’s not just hypotheticals and sentiment surveys showing fragility. The real estate market has rolled over as Canadians grow more hesitant. This is also coming through in retail sales, while the March jobs report showed that firms are already trimming their workforce. Inflation also eased last month, which opened the door for rate cuts today, but the Bank of Canada decided not to walk through it.
“Looking forward, the Bank is expected to cut further. Market pricing for a cut in June jumped today, with about 50 basis point in cuts expected over the remainder of 2025. This makes sense to us. Canada may have received a lower effective tariff rate than other countries, but the damage has already been done. Canada’s economy has started to show signs of weakness, which we think will continue over the coming months. This means the Bank of Canada should resume cutting rates at its next meeting on June 4.”
Ashish Dewan, investment strategist at Vanguard Canada
“In line with the overall market sentiment and our own internal expectations, the Bank of Canada decided to hold its policy rate at 2.75%. Although the ‘uncertainty tax’ has already shown signs of impacting the Canadian labor market and business investment, a 2.9% year-over-year increase in CPI-median data in March, one of the Bank’s preferred measures of inflation, coupled with uncertainty around the economic outlook from US tariffs gave the central bank reasons to pause rate cuts. Despite leaving rates unchanged, we expect the Bank of Canada to reduce its policy rate to 2.25% by the end of the year, given a lower growth environment.
“The central bank underscored the risk of trade war uncertainty and the headwind of weakening consumer and business confidence, as well as falling consumption. ‘The Governing Council will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs,’ the Bank said in a statement released alongside the decision.”
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