Bank of Canada must get comfortable with the unknown as long as Trump is in charge

In two straight decisions, the Bank of Canada has said it was leaving its key overnight lending rate unchanged as it gains "more information on U.S. trade policy and its impacts."

The problem is that since Donald Trump reclaimed the presidency, gaining more information about U.S. trade policy has been nearly impossible. In fact, it's now abundantly clear that uncertainty is a core part of the administration's plan.

It's hard to know from one day to the next what Trump is going to do.

"We still do not know what tariffs will be imposed, whether they'll be reduced or escalated, or how long all of this will last," Bank of Canada governor Tiff Macklem said back in April. Those remarks could just as well have come this week.

Since then, Prime Minister Mark Carney met with Trump in Washington. Carney called those talks "wide-ranging" and "constructive."

The meeting was heralded as a sort of reset of Canada-U.S. relations and the beginning of a path out of the trade war. But those kinds of claims have tended to become the stuff of head-spinning reversals of late.

Canada was slapped with a doubling of tariffs on steel and aluminum this week. The original 25 per cent tariffs were expected to hit those industries hard. Fifty per cent tariffs will clobber them.

"At a 50 per cent tariff, we basically consider the U.S. market closed — completely closed, door slammed shut, if you will — to Canadian steel," said Catherine Cobden, president and CEO of the Canadian Steel Producers Association.

The question at the heart of Canada's trade policy is how anyone, from businesses to central bankers, can plan for a future so mired in unknowns.

And that's part of the U.S. strategy.

U.S. Treasury Secretary Scott Bessent has called it "strategic uncertainty."

Bessent is one of Trump's key economic advisers and an architect of the administration's approach to trade and tariffs. At a briefing in April, he admitted that the United States is using uncertainty as leverage to reshape global trade.

"We've created a process. I think the aperture of uncertainty will be narrowing, and as we start moving forward, announcing deals, then there will be certainty, but you know certainty's not necessarily a good thing in negotiating."

The impact of that can be seen and felt right across Canada.

Automakers have cancelled plans to expand. Businesses have had to reroute shipping and find new customers outside the U.S. The Bank of Canada's most recent Business Outlook Survey, which was released in April and covers the first quarter of 2025, found that "sentiment has deteriorated, and uncertainty is widespread."

The trade war is looming over Canadian industries whether they're exposed to the current batch of tariffs or not.

"Not that many sectors actually face tariffs, but any manufacturer thinking of building a plant in Canada to serve the U.S. market is going to wonder whether their sector could be next," CIBC chief economist Avery Shenfeld said in an interview.

A recent survey by Bloomberg found that the majority of economists believe Canada will slip into a recession this summer as the trade war deepens and uncertainty bites.

CIBC's forecast shows the Canadian economy will avoid an outright recession but suffer through six months of roughly zero growth and an unemployment rate that continues to grind higher by the month.

"So to some extent, it'll feel a bit like a recession for those at least in the line of fire and losing their jobs," Shenfeld said.

So far the economic data has come in stronger than expected. Much of that can be chalked up to businesses trying to get ahead of the tariffs through the spring. Exports surged as Americans tried to get product across the border before they'd have to pay the tariff.

Macklem said at his interest rate announcement on Wednesday that the Canadian economy was "softer but not sharply weaker."

Thomas Ryan, North America economist with Capital Economics, said he doesn't expect that will last. Forecasts by the London-based analysis and consultancy firm show GDP and jobs numbers will slow in the coming months.

If that happens, Ryan said, the Bank of Canada will start cutting rates at its next meeting on July 30.

"Accordingly, we judge that three more rate cuts this year are still on table, which would bring the policy rate down to two per cent," he wrote in a research note.

Put another way, the world may indeed be awash in uncertainty, but the impact of all those unknowns is becoming more real by the day. Eventually the certainty of the impact will outweigh the uncertainty of the policy emanating from the White House. And then the Bank of Canada will have to act.

WATCH | Bank of Canada must contend with U.S. tariff uncertainty:

As U.S. President Donald Trump applies 50 per cent tariffs to all steel and aluminum imports, the Bank of Canada says it will hold its benchmark interest rate at 2.75 per cent. Senior business reporter Peter Armstrong says the economic uncertainty caused by fluctuating U.S. trade policy is driving investment away from Canada.