Bank of Canada Holds Rates Amid Rising Trade Uncertainty

In response to a period of heightened trade tensions and policy unpredictability, the Bank of Canada has decided to keep its policy interest rate steady at 2.75%, pausing after seven consecutive rate cuts.

The Canadian economy ended 2024 on strong footing, with inflation near the 2% target and household spending buoyed by earlier rate reductions. However, a shift towards protectionism in US trade policy, characterized by new tariffs and unpredictable policy moves, has dramatically increased global economic uncertainty and cast a shadow over Canada’s growth outlook. These developments have unsettled financial markets, weighed on business and consumer confidence, and raised concerns about higher inflation.

The Bank of Canada highlighted that recent data show a notable slowdown in business investment and household spending for early 2025, with GDP growth expected to weaken further as initial boosts from pre-tariff export surges dissipate. Labor market improvements are also stalling, with employment levels showing little growth and many firms scaling back hiring plans in light of trade disruptions. Inflation has risen modestly to 2.3%—largely due to the expiration of tax relief and higher imported goods prices—while expectations for near-term inflation have picked up on anticipation of further tariff-driven cost increases.

Looking ahead, the Bank presented two possible scenarios: one where most tariffs are eventually negotiated away, leading to muted growth and inflation below target, and another where a prolonged global trade war triggers a recession, sustained weaker growth, and a temporary spike in inflation above 3%. The reality is likely to fall somewhere between these possibilities, depending on how US trade policies evolve in the coming months.

Given the current unpredictability of external trade policy and its mixed influences on inflation, the Bank of Canada is opting for caution. Policymakers emphasize they will act decisively if clear economic signals emerge, but will otherwise proceed carefully as they monitor risks—including further impacts on exports, employment, and consumer prices. Their core objective remains to ensure price stability and support sustainable economic growth as the landscape for Canadian trade and inflation remains unusually uncertain.

This decision underscores the central bank’s commitment to stability amid significant external shocks and highlights the challenges that unpredictable global trade actions pose for monetary policy and economic planning.