The Bank of Canada maintained its key policy rate on Wednesday by 2.75 percent, its first pause after seven consecutive cuts, and said that the uncertainty surrounding us the US tariffs. UU. It made it impossible to issue regular economic forecasts.
On the other hand, the Central Bank produced two scenarios about what could happen, including one that predicted a deep recession in Canada and an increase in inflation.
Governor Tiff Macklem said the bank, which began to reduce last June, had maintained interest rates, since it obtained more information on the impact of rates and would carefully proceed.
“Much has happened since our March decision five weeks ago, but the future is really not clearer. We still do not know what tariffs they will be imposed, if they will be reduced or increased and how long everything will last,” Macklem said in his opening comments after the tariff decision was announced.
“That means being less vision of the usual until the situation is clearer.”
Bank’s monetary policy would ensure that inflation remained under control and support economic growth, Macklem said.
Economists interpreted the governor’s comment as an indication that the current bank’s pause was not the end of the flexibility cycle and that it would increase to support the economy if necessary.
“It has clearly opened the possibility of being much more aggressive if the economy deteriorates substantially,” said Douglas Porter, chief economist of BMO Capital Markets.
Andrew Kelvin, head of Canadian and global tariff strategy in TD Securities, said in the future, the weakness is expected to accumulate in the economy and that would force the bank to reduce rates again.
The Bank of Canada maintained its key policy rate by 2.75 percent, its first pause after seven consecutive cuts. Governor Tiff Macklem said the uncertainty around him the tariffs of us made it impossible to issue regular economic forecasts.
In the short term, the Central Bank expects the GDP of the second quarter to be much weaker, after a 1.8 percent growth forecast for the first quarter. Inflation is immersing approximately 1.5 percent in April, mainly due to the elimination of carbon taxes and lower crude oil prices.
The Central Bank said it was difficult to predict the path of the long -term economy.
“The forecasts for economic growth are of little use as a guide for anything,” Macklem said.
Two possible scenarios
For the first time since the Covid-19 Pandemia, the Canada Bank discarded the economic forecasts it gives in a quarterly monetary policy report. Instead, he offered two possible scenarios.
The first scenario assumes that most tariffs finally retire through negotiations, which will stop GDP in the second quarter. The economy then expands moderately, while inflation sinks at 1.5 percent before returning to the target of two percent.
In the second scenario, the bank assumes that tariffs cause a long -standing world commercial war. In this case, the Canadian economy enters a significant recession for a year, while inflation increases to 3.5 percent in mid -2016.
Macklem said that under this scenario, American tariffs would permanently reduce Canada’s potential production and reduce the country’s standard of living.
This type of result would be “painful” for Canada, he said at a press conference after the ad. Some exporters could go to bankruptcy, unemployment would increase and Canadians could have to reduce their expenses in that second scenario.
Macklem added that if the incoming information clearly points in any direction, the bank is ready to act decisively.
The governor also said that these scenarios were two possibilities and that they do not cover the possible results. “The message here is that we have to be flexible and adaptable,” he said.
Canada’s economy, which had been staggering for most of the last year, found its balance when 2024 was finishing.
But the decision of the president of the United States, Donald Trump, unilaterally slapped a barrage of tariffs on Canada and Mexico, followed by the rest of the world, has deed from commercial investments and expenses of consumers.
This is evident in recent hard data that showed lack of employment growth, high inflation and weaker economic growth.
