The Bank of
Canada (BoC) kept its benchmark interest rate unchanged at 2.75 per cent on
Wednesday. Market participants had mostly expected the rate to remain hold in April.
In its policy
statement, the Canadian central bank noted:
- Shift
in direction of U.S. trade policy and the unpredictability of tariffs have
increased uncertainty, diminished prospects for economic growth, and raised
inflation expectations;
- Pervasive
uncertainty makes it unusually challenging to project GDP growth and inflation
in Canada and globally;
- If uncertainty is high but U.S. tariffs are limited in scope (scenario 1),
Canadian growth is expected to weaken temporarily and inflation to remain
around the 2% target;
-
In case of a protracted trade war (scenario 2), Canada’s economy is seen to fall into
recession this year and inflation rises temporarily above 3% next year;
- Many
other trade policy scenarios are possible. There is also an unusual degree of
uncertainty about the economic outcomes within any scenario, since the
magnitude and speed of the shift in US trade policy are unprecedented;
- Extreme
financial market volatility is adding to uncertainty;
-
CAD has recently appreciated as a result of broad USD weakness;
-
Canada’s economy is slowing as tariff announcements and uncertainty pull down
consumer and business confidence. Trade tensions are also disrupting recovery
in the labour market;
- Lower
global oil prices are expected to dampen inflation in the near term;
- Tariffs
and supply chain disruptions may push up some prices. How much upward pressure
this puts on inflation will depend on the evolution of tariffs and how quickly
businesses pass on higher costs to consumers;
- Short-term
inflation expectations have moved up, as businesses and consumers anticipate
higher costs from trade conflict and supply disruptions;
-
Longer-term inflation expectations are little changed;
- Governing
Council 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;
- Focus
will be on ensuring that Canadians continue to have confidence in price
stability through this period of global upheaval;
-
BoC will support economic growth while ensuring that inflation remains well-controlled;
- Governing
Council will proceed carefully, with particular attention to the risks and
uncertainties facing the Canadian economy;
- Monetary
policy cannot resolve trade uncertainty or offset the impacts of a trade war.
What it can and must do is maintain price stability for Canadians