The Bank of Canada kept its benchmark overnight lending rate unchanged at 2.75% on Wednesday, pausing after seven consecutive rate cuts, as escalating US tariffs and growing trade uncertainty cloud the economic outlook.
The bank rate remains at 3%, and the deposit rate at 2.70%, the central bank said in a statement.
“The major shift in direction of US trade policy and the unpredictability of tariffs have increased uncertainty, diminished prospects for economic growth, and raised inflation expectations,” the bank said in a statement.
The bank said the current environment makes it “unusually challenging” to project both GDP growth and inflation, offering two alternate scenarios based on future developments in US trade policy.
In the first scenario, uncertainty is high but tariffs are limited in scope. Canadian growth weakens temporarily and inflation remains around the 2% target.
In the second scenario, an extended trade war causes Canada’s economy 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,” it noted.
The bank stressed that the global economic growth was solid in late 2024 and inflation has been easing towards central bank targets.
Yet tariffs and uncertainties have made the outlook for the world economy worse. Amidst rapidly declining sentiment and increasing policy uncertainty, the US economy is exhibiting indications of slowing down, and inflation expectations have increased, according to the statement.
“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,” the bank added.