Bank of Canada holds interest rate at 2.75% amid U.S. tariff 'uncertainty'

Doug Porter, chief economist from the Bank of Montreal, says “the bank's rate decision and commentary were right down the middle of the plate, delivering few surprises. “

If the economy slows as widely expected, “the door is still wide open for the bank to cut rates in July,” he said.

At least one economic forecast states the Bank of Canada will reduce its key overnight lending rate all the way down to two per cent by the end of this year.

Thomas Ryan, the North America economist for Capital Economics, says the bank’s statement highlighted recent resiliency in the data. GDP and jobs numbers have come in somewhat stronger than expected.

“This poses a risk to our view that the bank will cut rates three more times this year but, with the economy rapidly losing momentum and upside risks to inflation fading, we are sticking to that view. That would take the policy rate to two per cent.”

That would mean the bank would have to start cutting at its next meeting on July 30.

“If this uncertainty continued, if U.S. tariffs continued, and that continued to weaken the Canadian economy” — and if upward pressures on inflation are contained — “there could be a need for a further policy reduction in our interest rate,” Macklem said.

Asked how challenging it’s been to make decisions in the current environment, Macklem said “it’s difficult for us.”

But he added that he’s more worried about businesses having to navigate a different playbook “every week,” and about people losing their jobs and households trying to navigate high costs.

“It’s very difficult for everyone. I think looking forward, if Canada can get a renewed trade agreement with the U.S., that reduces uncertainty … you’ll see some rebound in activity.”

“Like everybody else, we’re watching announcements coming out of the White House very carefully,” Macklem said, chuckling.

The Bank of Canada says the economy is stuck between two scenarios it believes the trade war will fall into.

In Scenario 1, the bank “assumes most of the new tariffs get negotiated away, but the process is unpredictable, and businesses and households remain cautious.”

In Scenario 2, it assumes “a long-lasting global trade war.”

Under that scenario, the economy slides into a recession that lasts a year, inflation rises to three per cent and U.S. tariffs permanently reduce Canadian output.

“We're somewhere between the two scenarios. But it’s a moving target,” Macklem said at his news conference.

The governors are asked how the federal government’s decision not to release a spring budget is affecting their deliberations around interest rates.

“We’re doing what we always do. When governments announce new spending plans ... we take those on board, we build those into our outlook,” said Macklem.

But he was blunt.

“To be frank, the budget is not the biggest source of uncertainty facing the Canadian economy. It’s U.S. tariffs.”

Macklem and deputy governor Carolyn Rogers are asked about the strength of the loonie and how much it weighed into their decision.

“The dollar has strengthened recently. We do think that’s had some effect on inflation,” said Rogers.

But she stressed that “there’s not a magic formula or a single data point that we look at” when making an interest rate decision.

Macklem is asked about whether inflation will need to slow in May and June for the central bank to consider a rate cut in July.

We’ll get two more inflation readings before the next decision in July, the governor noted.

“We will be looking at those carefully,” he said.

With the bank’s preferred measures of core inflation having moved up in April, “that has got our attention,” said Macklem.

While Macklem doesn’t want to put too much weight on one month of data, the uptick in core readings “does make you think that underlying inflation could be a little firmer than we thought.”

As tariff uncertainty bleeds into the inflation outlook, Macklem says the governing council is “proceeding carefully, with particular attention to the risks. This means we are being less forward-looking than usual.”

The Canadian labour market is also weaker, Macklem said. Unemployment rose to 6.9 per cent in April, with most of the job losses in sectors that are exposed to trade turmoil.

“Businesses are generally telling us that they plan to scale back hiring,” Macklem said, a nod to the central bank’s Business Outlook Survey.