Officials acknowledged Canada’s economy had ended 2024 on a strong note, with robust growth of 2.6% and inflation near the 2% target, supported by previous rate cuts.
However, the outlook for early 2025 weakened considerably due to increased caution among consumers and businesses. Surveys have indicated a significant pullback in spending and investments due to fears of broader tariffs.
“Absent a further deterioration in the outlook, the Bank isn’t keen on cutting rates further,” noted BMO economist Benjamin Reitzes.
He emphasized that policymakers are increasingly wary of rising inflation pressures tied to tariff-related cost increases, a weaker Canadian dollar, and possible supply chain disruptions.
Inflation, particularly given February’s unexpectedly sharp rise, remains the Bank’s primary concern. Although softer domestic demand could offset some price pressures, policymakers remain vigilant about preventing temporary tariff-driven price hikes from becoming generalized inflation.
Oxford Economics economist Michael Davenport agreed, suggesting the Bank might now pause to balance the economic impact of trade disputes against growing inflation risks.
“The BoC is likely done cutting interest rates as it tries to balance the negative hit to economic activity from the trade war against higher prices, but we can’t rule out a couple more 25bp rate cuts this year, especially if US tariffs or Canadian retaliatory tariffs are scaled back,” he wrote. “Still, we think it’s unlikely that the BoC will lower the policy rate into stimulative territory below 2.25% – the bottom of its 2.25%-3.25% neutral range.”
Other key takeaways from the Bank’s March deliberations:
- U.S. slowdown and tariff sentiment loom large: The Governing Council noted that U.S. growth had weakened more than expected in late 2024, especially in business investment. While consumption remained strong, sentiment surveys showed that U.S. households and businesses were becoming more cautious in response to trade policy announcements—although this had yet to be reflected in hard data.
- Tariffs are driving up business costs and may pressure inflation: Members discussed how the weaker Canadian dollar and tariff-related disruptions had already raised costs for imported machinery and intermediate goods. Businesses were also facing new expenses tied to diversifying suppliers, and some early signs of pass-through to prices—particularly in food and goods—were emerging.
- Inflation expectations are edging up: Members observed a rise in short-term inflation expectations since the January report, largely due to public awareness of potential tariff-related price increases. The Bank committed to closely watching for any signs that these expectations could become unanchored.
- No forward guidance due to complexity of risks: The Governing Council opted not to provide forward guidance, citing the complexity of risks and uncertainty over how the trade conflict will affect both inflation and economic activity.
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Last modified: March 26, 2025