Summary

The Bank of Canada announced this morning that it is holding its trendsetting policy interest rate at 2.75%. After seven rate cuts in a row, this is the first pause since April 2024 when the Bank held the policy rate at 5%.

The theme of today’s announcement was uncertainty. From the statement:

“Pervasive uncertainty makes it unusually challenging to project GDP growth and inflation in Canada and globally.“

“Governing Council will proceed carefully, with particular attention to the risks and uncertainties facing the Canadian economy.”

Our quick take? We knew it was a close call, but we were leaning slightly toward the BofC cutting today (i.e. cut now, pause later) to get in front of trade headwinds. Despite today’s pause, we do see the BofC reducing the policy rate to 2% by year end (see below).

Fuzzy forward guidance 

We didn’t get much from the Bank on what’s next, other than they “will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”

No forecast, just scenarios 

This wasn’t a standard rate announcement. Amid the thick fog of uncertainty, we also got a new Monetary Policy Report. That usually means a new forecast, but instead, we got two “illustrative” scenarios:

Scenario 1: Most tariffs imposed since the trade conflict began are negotiated away, but the process is unpredictable. Uncertainty about trade policy continues until the end of 2026.

Scenario 2: The uncertainty and limited tariffs in Scenario 1 persist, and other US tariffs are added. A long-lasting global trade war unfolds.

In Scenario 1, economic growth is sluggish for the next three years (see the chart below). In Scenario 2, growth slows to 0.8% this year followed by a 0.2% contraction in 2026 and a modest rebound in 2027.

Inflation only appears to be an issue in Scenario 2, temporarily rising above 3% next year to average 2.7%. But under both scenarios, inflation is 2% or lower by 2027.

Staying ‘neutral’

Keen observers will note on page 51 the Bank‘s estimate of the ‘neutral’ interest rate is 2.25-3.25%, unchanged from previous estimates. This gives an indication of where the Bank may land on its policy rate when things normalize—that is a world in which inflationary pressures are not too high or too low (think Goldilocks).

Over to you…

In the lead up to the meeting, Governor Tiff Macklem said monetary policy can only do so much given that a trade war complicates the normal response by putting both upward (via tariffs) and lower (via weaker growth) pressure on prices.

He said something along the same lines today…

“Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war. What we can and must do is ensure that Canadians continue to have confidence in price stability.”

In other words, the Bank is saying it is limited by the monetary policy tools at its disposal. Our interpretation is that fiscal policy may need to carry more weight and that more structural improvements are needed. The Bank has previously alluded to this in the ‘break the glass’ speech regarding Canada’s productivity emergency. By ‘structural’, think things beyond interest rates like getting products to market via new transportation  infrastructure, scaling up small companies, streamlining regulations to get major projects built, and training to address skills mismatches.

What’s next?

Despite today’s pause, we don’t think the BofC is done cutting. As the statement reads, inflation has ticked up and so have inflation expectations. But “longer term inflation expectations are little changed.” We believe there is room to cut as long as those longer term expectations remain anchored. Our forecast has the policy rate falling to a terminal rate of 2%. We know that tariffs raise prices, but also slow growth. It seems like the BofC for now is putting less emphasis on ‘stag’ and more on ‘flation’.

Answer to the previous trivia question: The Port of Los Angeles is the busiest seaport in North America.

Today’s trivia question: What is the busiest passenger train station in North America?