Bank of Canada holds rates, says tariffs could cause deep recession

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.

“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 that inflation remained under control and would support economic growth, he added.

The Canadian dollar extended gains after the policy decision and was trading firmer by 0.51% to 1.3884 against the U.S. dollar, or 72.03 U.S. cents. Yields on the two-year government bonds were up 0.9 basis points to 2.541%. Currency swap markets are betting on 54% odds of another pause on June 6, when the bank announces its next monetary policy decision.

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The first assumes that most of the tariffs are eventually withdrawn through negotiations, which would stall GDP in the second quarter.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.

Source: Marketscreener