The Bank of Canada kept its interest rate at 2.75% as expected at its meeting just moments ago, noting that the significant shift in US trade policy and the unpredictability of tariffs have increased uncertainty and weakened economic growth prospects.
The Bank’s interest rate report stated that the forecasts contained in its April Monetary Policy Report presented different scenarios. The first scenario, with increased uncertainty, projects Canadian growth to weaken temporarily and inflation to remain at 2%. The second scenario, if the trade war continues, could cause the Canadian economy to contract this year and inflation to rise above 3% next year.
Canada’s inflation rate was 2.3% in March, lower than February’s. This increase in inflation reflects a recovery in commodity prices and the end of the temporary suspension of the Goods and Services Tax. Starting in April, the index will decline for a year due to the removal of the carbon tax on consumers and the decline in global commodity prices. However, tariffs and supply chain disruptions may lead to some commodity prices rising, with the Consumer Price Index expected to slow to 1.5% in April. GDP is expected to grow by 1.8% in the first quarter of this year, but with exports expected to decline, growth may be much weaker in the second quarter.
The fate of the Canadian economy in the medium term depends critically on US trade policy, which remains unpredictable. Therefore, point forecasts for economic growth and inflation are not reliable guides. Therefore, various scenarios have been presented, and the Bank will proceed cautiously in assessing risks and the impact of tariffs on export demand.