the bank stands pat amidst a trade spat

The Bank of Canada opted to maintain its trend-setting policy interest rate today, at 2.75%, after lowering it at each of its previous seven meetings.

The Bank finds itself in a tricky position. There is little inflationary pressure from domestic sources, with a relatively soft labour market and headline inflation sitting at very palatable 2.3%. Furthermore, disinflationary effects are expected from the removal of the consumer carbon tax on April 1st. That said, there are plenty of inflationary concerns originating from beyond the country’s borders that the Bank of Canada must consider amidst the current landscape of global trade uncertainties.

In its April Monetary Policy Report (MPR) the Bank presented two scenarios for Canada’s economy stemming from the effects of US tariffs. The first scenario is based on limited tariffs but ongoing uncertainty which would lead to weaker growth temporarily and inflation that remains around the 2% target. The second scenario, however, envisions an ongoing trade war, which pushes the Canadian economy into recession and is accompanied by a temporary increase in inflation beyond 3%. The Bank further acknowledged there are many additional scenarios to consider given constant shifting in US trade policy.

In today’s release, the following statements from the Bank (and our interpretations of them) are key for those looking to understand the Bank’s perspective and how it will proceed in the coming months as it relates to setting interest rates.

“Tariffs and uncertainty have weakened the outlook [for global economic growth]. In the United States, the economy is showing signs of slowing amid rising policy uncertainty and rapidly deteriorating sentiment, while inflation expectations have risen.”

With the US being Canada’s primary trading partner, rising prices and deteriorating sentiment could negatively impact our exports to the US, as well weaken our dollar.

“In Canada, the economy is slowing as tariff announcements and uncertainty pull down consumer and business confidence. Consumption, residential investment and business spending all look to have weakened in the first quarter. Trade tensions are also disrupting recovery in the labour market. Employment declined in March and businesses are reporting plans to slow their hiring. Wage growth continues to show signs of moderation.”

These data all point to softening demand in Canada and, on their own, point to a need for expansionary monetary policy. The following quote sheds light on the other half of the problem:

“We expect tariffs and supply chain disruptions to 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.”

This will ultimately guide the Bank’s actions going forward. It will have to weigh the downside pressure on demand (which is disinflationary) against upward pressure on prices (inflation).

“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 will be patient. And with the current policy rate sitting within its theoretically “neutral” range (of 2.25-3.25%), it can afford to sit back and monitor the competing pressures on demand and prices from tariffs before making adjustments to monetary policy.

“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.”

This statement has been made in each of the past two interest rate announcements, as the Bank wants to emphasize that monetary policy is not the best tool for offering economic relief to Canadians during this trade dispute. Instead they will be focused on maintaining target inflation.