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April 16, 2025BANK OF CANADA MONETARY POLICY The Bank of Canada maintained its target for the overnight rate at 2.75%, with the Bank rate kept at 3.0% and the deposit rate at 2.7%.
Global economic growth was solid at the end of 2024 and inflation has been moving towards central bank targets. Tariffs have brought uncertainties to the outlook. The US economy is showing signs of slowing amid rising policy uncertainty and rapidly deteriorating sentiment. Inflation expectations have risen. Euro Area growth has shown modest growth in early 2025 with weakness in the manufacturing sector. China’s economy has been strong at the end of 2024 and is showing signs of slowing in in 2025.
With considerable uncertainty around the US trade policies, the Bank of Canada considers two scenarios instead of its usual base-case analysis. Scenario 1 is where most tariffs imposed are negotiated away, but the process is unpredictable, and uncertainty continues until the end of 2026. Scenario 2 has the uncertainty and tariffs in scenario 1 persisting and other tariffs are added. A long-lasting global trade war unfolds.
In Scenario 1, global and Canadian growth weaken temporarily before picking up. Inflation in Canada expected to fall to around 1.5% for one year, mostly reflecting the removal of the consumer carbon tax. It then returns to the 2% target. Canada’s GDP stalls in Q2 2025 and then expands at a moderate pace (1.6% through the end of 2027), resulting in persistent excess supply.
In Scenario 2, a sharp global slowdown and an increase in inflation occur, especially in the United States. In Canada, a significant recession ensues over the next year, and inflation temporarily rises above 3% in mid-2026 before returning to the 2% target in 2027. Canada’s GDP to recover gradually to around 1.8% in 2027.
CPI inflation has been volatile in Canada due to the GST/HST holiday. Excluding the tax holiday, inflation rose from 1.9% in November 2024 to 2.3% in March 2025. Excluding shelter services, inflation is near historical average. Short term inflation expectations have risen with both businesses and consumers expecting trade conflicts to push up prices. Long term inflation expectations are unchanged.
Canada’s GDP grew 2.6% in the last quarter of 2024 with an upward revision in Q3 to 2.2%. The first quarter of 2025 is estimated to slow down to 1.8%, below expectations in the January Report. Domestic demand has expanded by 5.6% in Q4 2024 but is expected to slow in the Q1 2025 reflecting slowdown in consumer spending and business investment. Residential investment is on track to contract by roughly 7% in the first quarter, after a rapid expansion in Q4 2024. Business investment to have declined by 2.0% influenced particularly by those sectors that rely on US markets.
Employment contracted in March 2025 with tariffs and uncertainty about trade policies disrupting the recovery in the labour markets. Unemployment reached 6.7% in March, up from February (6.6%), but lower than the recent peak in November 2024 (6.9%). Labour market appears to be in modest excess supply and wage growth in private sector continues to show signs of moderating.
Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war. It can ensure higher prices do not lead to prolonged inflation. The Governing Council will be assessing downward pressures on inflation from weaker economy and upward pressure on inflation from higher costs. The Bank is committed to maintain price stability for Canadians.
The next scheduled date for announcing the overnight rate target is June 4, 2025. The Bank will publish its next Monetary Policy Report on July 30, 2025.
Source: Monetary Policy press release; Monetary Policy press conference; Monetary Policy Report (April)
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