While inflation eased to 2.3% in March, the Bank cautioned that short-term inflation expectations have risen as businesses and consumers anticipate ongoing trade disruptions.
Employment conditions have also weakened, with job losses recorded in March. Additionally, household spending has shown signs of slowing, and business investment remains subdued amid growing uncertainty.
“Our focus will be on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval,” the Bank said. It emphasized that monetary policy “cannot resolve trade uncertainty” but must focus on maintaining inflation control and supporting economic growth.
Instead of a typical forecast, the Bank’s April Monetary Policy Report (MPR) outlines two potential scenarios reflecting divergent outcomes based on future trade developments:
Scenario 1: Prolonged uncertainty, but limited damage
This relatively optimistic scenario assumes most tariffs will eventually be negotiated away, although uncertainty could persist into late 2026. Under this scenario, GDP growth would slow temporarily around mid-2025 but then gradually pick up, averaging about 1.6% annually through 2027. Inflation might briefly fall below the Bank’s 2% target due to the removal of the consumer carbon tax but is expected to stabilize around the target thereafter.
- GDP growth slows but avoids contraction, averaging 1.6% in 2025, slightly lower than the January forecast of 1.8%.
- Growth remains subdued, reaching 1.4% in 2026 and rising modestly to 1.7% in 2027.
- Inflation temporarily dips to about 1.5% in mid-2025 following the removal of the consumer carbon tax, returning to the 2% target later.
Scenario 2: Full-blown trade war and recession
Under this more severe scenario, a sustained global trade conflict leads Canada into a pronounced recession throughout 2025, followed by a slow and uneven recovery. GDP growth would contract significantly, averaging around -1.2% during 2025. Inflation would spike above 3% temporarily in mid-2026 due to persistent tariff pressures but would eventually ease back to the 2% target by 2027.
- GDP contracts for four consecutive quarters, resulting in a sharp downturn with overall growth of just 0.8% in 2025 and a further decline of -0.2% in 2026.
- Growth recovers modestly to 1.6% in 2027, reflecting significant damage to potential economic output and household incomes.
- Inflation mirrors Scenario 1 initially, but then rises above 3% by 2026 due to ongoing tariff impacts before normalizing to the 2% target.
Why no base-case forecast?
The Bank said the sheer speed and scale of U.S. trade policy shifts make a traditional economic projection unworkable.
“The unpredictability of U.S. trade policy, and the speed and magnitude of the shifts, are making the economic outlook very uncertain,” it noted.
Until the path forward becomes clearer, the Bank said it will proceed cautiously and remain focused on its inflation mandate. “Governing Council will proceed carefully, with particular attention to the risks and uncertainties facing the Canadian economy,” it said. “Our focus will be on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.”
Economists expect more cuts if trade tensions persist
The Bank’s decision to forgo a base-case forecast underscores just how fluid the current situation is, with BMO Chief Economist Douglas Porter noting that trying to overanalyze the Bank’s wording misses the bigger point.
“There’s not much sense parsing every word from the Bank when the economic landscape can shift so abruptly in coming weeks, and the Bank—like the rest of us—will be reacting and responding to those shifts,” he wrote.
Porter said the “deep trade uncertainty” is likely to weigh heavily on economic growth in the coming quarters, easing inflation pressures and paving the way for more rate cuts.
“We believe that the deep trade uncertainty will weigh heavily on growth in Q2 and Q3, blunting inflation pressures, and eventually prompting the Bank to trim rates further, ultimately taking them slightly below neutral—which would be entirely appropriate in a world of trade trauma.”
By the end of 2025, most of the Big 6 banks expect the Bank of Canada’s policy rate to settle between 2.00% and 2.25%.
BoC policy rate forecasts from the Big 6 banks
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Last modified: April 16, 2025