Commonwealth The Bank of Canada has chosen to hold its key policy interest rate at 2.75%, pausing for the first time after seven consecutive rate cuts. This decision, made in light of growing global uncertainty, reflects a cautious approach to monetary policy as the country faces a new and unpredictable economic environment.
Rather than providing its usual economic forecasts, the central bank has taken an unusual step and released two possible scenarios outlining how the economy could unfold in the coming months.
The bank assumes in the first scenario that negotiations will eventually roll back most tariffs. While this path would result in stalled economic growth during the second quarter of the year, it suggests a moderate recovery afterward. Inflation would initially dip to around 1.5% but would gradually return to the central bank’s 2% target, helping to stabilize the economy over time.
The second scenario presents a much more dire outcome. It assumes that the tariffs lead to a sustained global trade war, which, in turn, drives the Canadian economy into a significant recession lasting for about a year. Under this condition, inflation could spike to as high as 3.5% by mid-2026. The effects of such a scenario would be severe—Canada’s potential output would be permanently reduced, and the country’s overall standard of living would decline. With rising unemployment, bankruptcies among exporters, and reduced consumer spending, the economy would be under immense pressure.
The Bank of Canada emphasized that these are just two of many possible outcomes and that it must remain flexible and responsive to rapidly changing conditions. The bank’s current pause in rate changes does not necessarily mark the end of its easing cycle. Economists have interpreted the move and accompanying statements as a signal that the central bank is prepared to intervene further if the economic situation worsens.
Economists from major financial institutions believe additional rate cuts are likely later this year. With rising risks of a Canadian recession, experts forecast that at least two more rate reductions could be on the horizon. The central bank itself acknowledged that weakness is likely to build in the near term. Although first-quarter GDP growth is expected to be around 1.8%, the second quarter is predicted to be considerably weaker.
Inflation meanwhile, is expected to decline to about 1.5% in April. This decrease is largely due to the removal of carbon taxes and falling crude oil prices. Despite the slight drop, inflation remains a significant concern for policymakers, particularly given the volatility in global markets.
Canada’s economy showed signs of stabilization toward the end of 2024, after a year of uncertainty. However, data has already revealed a deficiency in job growth and slow economic activity, implying that the economy is once again vulnerable.
As the country navigates this complex landscape, the Bank of Canada has positioned itself to act swiftly depending on how events unfold. Its focus remains on maintaining inflation within its target range while supporting economic growth and safeguarding Canada’s financial system from escalating global trade tensions.
