- Randall Bartlett, Senior Director of Canadian Economics • LJ Valencia, Economic Analyst
Essentials of Monetary Policy
BoC Holds the Policy Rate Steady as Uncertainty Weighs Heavily on the Outlook
April 16, 2025
According to the Bank of Canada (BoC)
- As we expected, the Bank of Canada left the overnight policy rate at 2.75% in April—the lowest it’s been since August 2022—following cuts at the prior seven consecutive meetings.
- In the near term, the Bank of Canada is tracking a still-respectable 1.8% q/q annualized advance in real GDP growth to start the year following a solid 2.6% print to end 2024 (graph 1). At the same time, Q1 2025 CPI inflation surpassed the Bank’s projection in the January 2025 Monetary Policy Report (MPR). All told, recent economic conditions supported the Bank staying on the sidelines.
- Notably, much aligned with our recent analysis External link., “The elimination of the consumer carbon tax on April 1 will reduce CPI inflation by about 0.7 percentage points for one year.” When combined with lower global oil prices, this should take total CPI inflation to around 1.5% in April, in line with our updated outlook.
- However, the future is more uncertain beyond the very near term because of unpredictable US economic policy. As a result, the BoC opted to present “two illustrative scenarios that span a wide range of possible paths for US trade policy” (graph 2).
- Scenario 1 assumes that tariffs get negotiated away but persistent uncertainty weighs on households and businesses. As a result, real GDP growth stalls in Q2 2025 and only very moderately expands thereafter (graph 3).
- Scenario 2 assumes a long-lasting trade war, the resulting economic consequences of which are severe (graph 3). According to this scenario External link., “Canada’s GDP contracts in the second quarter and the economy is in recession for a year. Growth gradually returns in 2026 but remains soft through 2027 as US tariffs permanently reduce Canada’s potential output and lower our standard of living. Inflation rises above 3% in mid-2026 as tariffs, countermeasures and shifts in supply chains raise costs, pushing up many prices. Inflation then eases as weak demand limits ongoing inflationary pressures.”
Implications
Uncertain times call for uncertain forecasts. The Bank stepped up by providing two reasonable alternative scenarios to illustrate where US trade policies could take the Canadian economy over the next few years. As new information on tariffs is released, the Bank is regularly updating its tracking for the economy. It believes we are currently on a path in the middle of these scenarios, having been closer to Scenario 2 until just recently.
What this means for monetary policy going forward is less clear. While the Bank provides the path for real GDP growth and inflation over the next couple of years under its two scenarios, it gives no indication of what this could mean for monetary policy. We are of the view that more cuts are coming as the economy slows, possibly at the June meeting.
2025 Schedule of Central Bank Meetings
