Bank of Canada Interest Rate Announcement (April 16, 2025)

Bank of Canada holds rates even as tariffs threaten the economy

• The Bank of Canada (BoC) held its policy rate at 2.75%, following seven straight announcements where the bank cut rates. 
• The bank's outlook recognized that 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."
• The BoC also published its Monetary Policy Report (MPR), which instead of outlining its forecast, showed two scenarios for the economy depending on how tariff tensions unfold. One is a temporary shock that effectively flatlines the economy, but allows it to return to growth in the second half of 2025, and inflation remains around the 2% target. The other scenario is a prolonged trade war that sends the economy into a recession through the remainder of 2025, and inflation temporarily rises to 3%. 
• Regarding the future path of its policy rate, the bank stated that it will "proceed carefully, with particular attention to the risks and uncertainties facing the Canadian economy." The evolution of the trade war with the U.S. will determine if the BoC will resume cutting rates in the coming months.

Key Implications

• In reading the interest rate announcement and MPR, one would have thought the BoC decided to cut rates today. It highlighted the downside risks to the economy, with both scenarios showing a level of weakness that is deserving of further rate cuts. And it's not just hypotheticals and sentiment surveys showing fragility. The real estate market has rolled over as Canadians grow more hesitant. This is also coming through in retail sales, while the March jobs report showed that firms are already trimming their workforce. Inflation also eased last month, which opened the door for rate cuts today, but the BoC decided not to walk through it.
• Looking forward, the BoC is expected to cut further. Market pricing for a cut in June jumped today, with about 50 bps in cuts expected over the remainder of 2025. This makes sense to us. Canada may have received a lower effective tariff rate than other countries, but the damage has already been done. Canada's economy has started to show signs of weakness, which we think will continue over the coming months. This means the BoC should resume cutting rates at its next meeting on June 4th.

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