Statement by Governor Tiff Macklem

OTTAWA, April 16 (Reuters) – Governor Tiff Macklem of the Bank of Canada, along with Senior Deputy Governor Carolyn Rogers, addressed the public on the latest policy announcement and the April Monetary Policy Report (MPR).

Policy Interest Rate
The Governing Council has decided to maintain the policy interest rate at 2.75%, following a series of seven consecutive rate cuts.

Economic Overview
As 2024 concluded, the Canadian economy appeared robust. Inflation had remained near the 2% target since last summer, with significant interest rate reductions spurring household spending and revitalizing economic growth across many businesses.

However, uncertainties resulting from the United States’ protectionist trade policies and erratic delivery have unsettled financial markets, hindered global growth, and increased inflation expectations. The unpredictability surrounding U.S. trade policy complicates the situation, raising concerns about the potential impacts of a trade war on Canada’s economy.

During previous monetary policy meetings in January and March, the Governing Council reduced the interest rate by an additional 25 basis points as fears of rising U.S. tariffs mounted.

Given evolving circumstances, the decision was made to keep the policy rate stable to gather further insights on U.S. tariffs and their potential impacts. While monetary policy cannot eliminate trade uncertainty or mitigate trade conflict repercussions, it aims to maintain Canadians’ confidence in price stability.

The focus remains on balancing the downward pressure on inflation from a slowed economy against upward pressures from increasing costs. The Council is adopting a cautious approach but will act decisively if new information indicates a clear trend.

Current Economic Data
Recent data suggest a noticeable decline in business investment and household spending. Following a substantial 5.6% increase in final domestic demand in Q4 2024, the first quarter of 2025 is now expected to show stagnant growth. Exports are predicted to decline in the second quarter, weakening economic growth.

Despite job growth at the end of last year, trade tensions are threatening this recovery, leading to flat employment figures, including recent declines in March. Inflation in Canada has increased from 1.8% in January to 2.3% in March, attributed to the conclusion of the GST/HST holiday and a rebound in goods prices.

The immediate forecast for inflation is clearer, as the removal of the consumer carbon tax on April 1 is expected to reduce the Consumer Price Index (CPI) inflation by approximately 0.7 percentage points for a year. Additionally, lower global oil prices are anticipated to bring inflation down to about 1.5% in April.

Future Scenarios
Looking beyond the near term, the trajectory of Canada’s economy and inflation hinges largely on U.S. trade policy, now more unpredictable than ever. The April Monetary Policy Report (MPR) presents two key scenarios for consideration:
– Scenario 1: Assumes most new tariffs are renegotiated away, leading to stalled GDP growth and inflation dropping below the 2% target for 2025 and 2026.
– Scenario 2: Assumes a prolonged global trade war, resulting in significant economic repercussions, including a recession and GDP contraction in 2025 with elevated inflation rates exceeding 3%.

Both scenarios highlight that the future of trade policy remains a shifting target, uncertain and susceptible to changes. The Council emphasizes that potential tariffs will significantly influence inflation dynamics.

Closing Remarks
Recent shifts in U.S. trade policy have resulted in considerable uncertainty, with tariffs impacting key Canadian industries, causing volatility in financial markets. Canadian households and businesses prepare for a potentially weaker economic landscape and higher prices.

The Bank of Canada’s monetary policy will aim to maintain inflation control while fostering economic growth amidst these trade challenges. The principle of price stability will continue to guide the Council’s decisions.

The Senior Deputy Governor and I welcome questions from the audience.