Published on: April 17, 2025
Following a series of seven consecutive rate cuts and against a backdrop of persistent trade tensions, the Bank of Canada (BoC) announced on Wednesday that it is maintaining its key rate at 2.75%.
In a press release, the central bank explained that the major shift in the direction of US trade policy and the unpredictability surrounding tariffs have increased uncertainty, dampened the outlook for economic growth and raised inflation expectations. “Given the widespread uncertainty, it is exceptionally difficult to project gross domestic product growth and inflation in Canada and around the world,” warned Governor Tiff Macklem during a press briefing.
It is against this backdrop that the latest Monetary Policy Report explores two scenarios with different potential paths for US trade policy.
In the first scenario, uncertainty is high, but the scope of tariffs remains limited, ensuring that growth in Canada “weakens temporarily and inflation remains around the 2% target.” In the second scenario, a long-lasting trade war sends the Canadian economy into recession later in the year and inflation temporarily rises above 3% in 2026.
The central bank clearly acknowledged the uncertainty surrounding these forecasts, stating on the first page of its Monetary Policy Report that the current environment is “making the economic outlook very uncertain.” It should be noted that recession scenarios based on uncertainty are often nothing more than speculation. In fact, money has a much greater significance. For this reason, the extent of the tariffs ultimately absorbed by the consumers will determine whether or not we enter a recession.
By pointing to uncertainty as the main driver in its scenarios, the Bank of Canada isn’t considering weak productivity growth and strong real wage growth as a bad starting point from an inflation point of view. The inflation trajectory it outlines also appears to be distorted due to the very slow response of businesses in passing on price increases to consumers. The Bank expects inflation to be higher during a recession and lower outside of a recession.
What is surprising in the Bank's analysis is that it does not allow the savings rate to play a role in absorbing price increases, which corresponds to a 0%–100% scenario. The delayed response to inflation is hitting 100% real consumption. In Canada, the income of the first quintile accounts for 32% of total consumption, which means that not all household income quintiles are equally sensitive to inflation.
We prefer to use an assumption where households split their bill between savings and consumption to avoid overestimating the impact on domestic demand. After all, inflation rose way more recently without triggering a consumer-led recession. The Bank recession scenario is therefore relying a lot on uncertainty.