Bank of Canada Halts Rate Cuts, Cites Uncertainty from U.S. Tariffs

In response to the fluctuating tariff policies of the Trump administration in the United States, the Bank of Canada made an unusual change in its policy report released on Wednesday. The bank emphasized that the economic outlook for the next few months would be uncertain, abandoning its usual practice of providing economic and inflation forecasts alongside its quarterly monetary policy report. The bank cited the high level of uncertainty, stating that "economic growth and inflation point forecasts are almost useless for any decision-making."

The Bank of Canada maintained its policy interest rate at 2.75%, marking the first time in eight meetings that it has paused rate cuts. In addition to the trade war, Canada is set to hold a general election on April 28, with the outcome also difficult to predict. The bank's governor, Tiff Macklem, stated in his policy speech that the decision to keep the policy rate unchanged was made to gather more information about the direction and impact of U.S. tariffs. He noted that the bank is still uncertain about the specific tariff measures the U.S. will implement, whether the tariff situation will escalate or de-escalate, and how long the process will last.

Instead of providing specific forecasts, the Bank of Canada outlined two scenarios for the impact of the ongoing global trade war. In the first, more moderate scenario, the bank assumes that most tariffs implemented during trade conflicts will be removed through negotiations. Under this scenario, the U.S. would retain a 25% tariff on steel and aluminum, while Canada would retain a 25% tariff on $29.8 billion worth of U.S. goods. In this case, Canada's economic growth would stall in the second quarter of this year before resuming moderate growth. By the end of 2027, the average GDP growth rate would be 1.6%, leaving the economy in a state of mild excess supply. Inflation would slow in the first half of the year before rising to 2% and remaining at that level.

In the more pessimistic scenario of a prolonged global trade war, the bank assumes that in addition to the conditions in the first scenario, the U.S. would retain tariffs on automobiles and impose a 25% tariff on all other countries' goods. Canada would impose a 12% tariff on $115 billion worth of U.S. goods. Under this scenario, a widespread trade war would severely impact Canadian households and businesses, leading to a year-long economic recession. GDP would contract for four consecutive quarters, with an average growth rate of -1.2%. The economy would then gradually recover in the remaining time in 2026 and 2027. The report noted that U.S. tariffs would permanently reduce Canada's potential output and living standards. In this case, inflation would rise above 3% in 2026.

Macklem noted that since Trump partially suspended "reciprocal tariffs" on April 9, U.S. trade policy is currently in a state between the two scenarios. However, he emphasized that the range of outcomes for inflation and economic growth depends on U.S. trade policy, which remains highly unpredictable. The bank's decision to abandon its usual practice of providing economic and inflation forecasts reflects the high level of uncertainty surrounding the trade war and its potential impact on the Canadian economy. The bank's focus on gathering more information about the direction and impact of U.S. tariffs highlights the challenges facing policymakers in navigating the current economic environment.