Canada Monetary Policy Research Brief

Uncertainties weigh on governing council’s decision making. After seven consecutive cuts, the Bank of Canada held its policy rate at 2.75 per cent in April. The monetary authority stated that major shifts in U.S. trade policy and the unpredictability of tariffs were key factors being considered. Not only has protectionist trade diminished economic growth prospects and raised inflation expectations, but looming uncertainty also makes it challenging to project future outcomes. At the same time, price pressures have been mounting in recent months, which has also increased concerns over a repeat in the post-pandemic inflation experience. Taking these factors together, the central bank decided to maintain its overnight rate in order to see how the fluid trade policy plays out, highlighting two main scenarios: one where tariffs are limited in scope and inflation remains around 2.0 per cent, and another where a protracted trade war drives Canada into a recession and pushes inflation above 3.0 per cent.