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Bank of Canada Holds Rates, Says Tariffs Could Cause Deep Recession

Reuters04-16

OTTAWA, April 16 (Reuters) - The Bank of Canada on Wednesday held its key policy rate at 2.75%, its first pause after seven consecutive cuts, and said the uncertainty around U.S. tariffs made it impossible to issue regular economic forecasts.

Instead, the central bank produced two scenarios on what could happen, including one which predicted a deep recession in Canada and a spike in inflation.

Governor Tiff Macklem said the bank - which began cutting last June - had kept rates on hold as it gained more information on the impact of tariffs and would proceed carefully.

"That means being less forward-looking than usual until the situation is clearer," he said in his opening remarks after the rates decision was announced.

"It also means we are prepared to act decisively if incoming information points clearly in one direction," he said. The bank's monetary policy would ensure inflation remained under control and would support economic growth, he added.

In the near term, the BoC expects second quarter GDP to be much weaker, after a 1.8% growth forecast for first quarter. Inflation is seen dipping to about 1.5% in April, mainly due to the removal of carbon taxes and lower crude prices.

The bank said it was difficult to predict the path of the economy for the long-term.

"Forecasts for economic growth are of little use as a guide to anything," said Macklem.

For the first time since the pandemic the BoC scrapped the economic forecasts it gives in a quarterly monetary policy report. It instead offered two possible scenarios.

The first assumes most of the tariffs are eventually withdrawn through negotiations, which would stall GDP in the second quarter. The economy then expands moderately, while inflation sinks to 1.5% before returning to the 2% target.

In the second scenario, the bank assumes the tariffs spark a long-lasting global trade war. In this case, the Canadian economy goes into a significant recession for a year while inflation spikes to 3.5% in mid-2026.

Macklem said under this scenario, the U.S. tariffs would permanently reduce Canada's potential output and lower the country's standard of living.

"To be clear, these are only two of many possible scenarios, and even these do not span the possible outcomes," he said.

Canada's economy, which had been teetering for most of last year, found its footing as 2024 was ending.

But U.S. President Donald Trump's decision to unilaterally slap a barrage of tariffs on Canada and Mexico, followed by on the rest of the world have dented business investments and consumer spending.

This is evident in the recent hard data which showed lack of job growth, elevated inflation and weaker economic growth.

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Comment2

  • If the oil pipeline is built, it will cause an economic boom.  Canada should use the tariff revenues to fund the pipeline. 
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  • 9Jansen
    ·04-16
    The US tariff blitz is a huge policy mistake.
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