Bank of Canada Holds Key Policy Rate

By Promit Mukherjee and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada on Wednesday held its key policy rate at 2.75%, marking its first pause after seven consecutive cuts. The bank expressed readiness to act decisively to control inflation.

The rate cut cycle began last June, and the bank opted for a pause to assess the impact of tariffs. Governor Tiff Macklem noted, “That means being less forward-looking than usual until the situation is clearer.” He assured that monetary policy would focus on controlling inflation and supporting economic growth.

Uncertainty surrounding U.S. tariffs hindered issuing regular economic forecasts, leading to two different scenarios instead. Economists interpreted the governor’s remarks as suggesting that this pause does not signify an end to the easing cycle; action will be taken if the economy worsens significantly.

Doug Porter, chief economist at BMO Capital Markets, pointed out the potential for aggressive measures if economic conditions deteriorate. Similarly, Andrew Kelvin of TD Securities indicated that economic weakness could lead to further rate cuts.

Currency swap markets reflect a 54% probability of another pause at the bank’s next monetary policy decision on June 6. Macklem stated, “We’re going to have to be flexible and adaptable as we move forward,” hinting at possible 50 basis-point cuts if necessary.

GDP Expectations

The BoC predicts a weaker second-quarter GDP, following an initial 1.8% growth forecast for the first quarter. Inflation is expected to dip to around 1.5% in April due to the removal of carbon taxes and lower crude oil prices.

Macklem acknowledged the challenges in predicting economic trends and mentioned the discontinuation of long-term economic forecasts in favor of two scenarios. The first scenario involves the gradual withdrawal of tariffs, leading to moderate GDP growth and inflation stabilizing at 2%. The second scenario anticipates a prolonged global trade war, causing a severe recession and inflation reaching 3.5% in mid-2026.

Macklem emphasized that these scenarios represent only a fraction of possible outcomes. Canada’s economy, after showing signs of recovery late last year, is impacted significantly by U.S. tariffs, which have contributed to stalled investments and consumer spending, reflected in a shortage of job growth, high inflation, and slowing growth.

“For countries like Canada, that are closely integrated with the United States, it is a particularly big deal,” he added regarding the U.S. tariffs.