Bank of Canada Holds Rate at 2.75%, Outlines Dual Economic Scenarios Amid Trade Uncertainty

The Bank of Canada maintained its benchmark interest rate at 2.75% on Wednesday, April 16, while presenting two divergent economic outlooks in response to heightened uncertainty stemming from U.S. trade tariffs.

Although inflation eased to 2.3% in March, the Bank cautioned that short-term inflation expectations have risen as businesses and consumers anticipate prolonged trade imbalances and volatility.

“Our primary focus is ensuring Canadians’ confidence in price stability during this period of global disruption,” the Bank stated, emphasizing that monetary policy “cannot eliminate trade uncertainty” but must prioritize inflation control and economic growth support.

Breaking from tradition, the Bank’s April Monetary Policy Report (MPR) outlined two potential scenarios based on trade developments:

Scenario 1: Prolonged Uncertainty with Limited Damage

This moderately optimistic outlook assumes most tariffs will eventually be lifted through negotiations, though uncertainty may persist until late 2026. Under this scenario, GDP growth would temporarily slow by mid-2025 before gradually recovering, averaging 1.6% annually through 2027. Inflation could briefly dip below the Bank’s 2% target due to the repeal of the consumer carbon tax but would stabilize within the target range (2–3%) thereafter.

Scenario 2: Full-Scale Trade War and Recession

In this severe scenario, a protracted global trade conflict pushes Canada into a pronounced recession throughout 2025, followed by a sluggish recovery. GDP would contract by an average of 1.2% in 2025, while inflation would temporarily exceed 3% by mid-2026 due to sustained tariff pressures before returning to the 2% target by 2027.

The Bank’s decision to forgo a single baseline forecast underscores the extreme volatility of current conditions. As BMO Chief Economist Douglas Porter noted, overanalyzing the Bank’s wording misses the bigger picture.

“Dissecting every phrase from the Bank is pointless when the economic landscape could shift dramatically in weeks—prompting the Bank, like the rest of us, to adapt,” he wrote.

Porter argued that “profound trade uncertainty” will significantly dampen growth in coming quarters, easing inflationary pressures and paving the way for further rate cuts.

“We expect severe trade uncertainty to sharply slow growth in Q2 and Q3, reducing inflation and ultimately compelling the Bank to cut rates further—potentially below neutral, a justifiable move in a trade crisis.”

By late 2025, most of Canada’s “Big Six” banks project the Bank of Canada’s key rate will settle between 2.00% and 2.25%.

The next scheduled rate announcement is set for June 4, 2025.