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On Wednesday, April 16th, at its regular policy meeting, the Bank of Canada (BoC) held its target for the overnight rate at 2.75 per cent. This is the first pause in rate policy following seven consecutive rate drops. With most banks and mortgage lenders, this will mean consumer prime rates will continue at 4.95 per cent (5.10 per cent with TD Canada Trust).

Why did the Bank of Canada hold the policy rate?

The continuing uncertainty around the tariff war started by the U.S. is still expected to have a significant negative short-term impact on GDP, but at the moment no one really know how long the tariffs will continue or whether they will further be negotiated or modified.

Therefore, the BoC outlined 2 different possible scenarios that might play out over the next 12-24 months and how each will require different monetary policy actions.

  • Scenario 1 – trade tariffs end up be relatively limited in scope, and the pressure of tariffs pushing up inflation is relatively offset by slower economic growth and layoffs. In this scenario inflation stays relatively close to the 2% target and the BoC can keep it’s policy rate close to the current level.
  • Scenario 2 – the trade war escalates and becomes a protracted issue, which would lead to the Canadian economy going into a recession this year but also have enough impact to cause inflation to rise above 3% next year. In this scenario, the BoC would find itself in the unenviable position of having to raise the policy rate to fight inflation even though that would have a further negative impact on the economy.

In a slight bit of good news, inflation did drop in March to 2.3 per cent (from 2.6 per cent in February), which means that inflation is in a relatively good place before the tariffs start hitting.

What’s next for the policy rate?

Until it becomes more clear which of the above scenarios is actually going to unfold, the BoC is going to hold its policy rate steady. When that will happen depends almost exclusively on the whims of President Trump and when his administration can actually announce a cohesive tariff policy that will stay in effect for more than a week before being paused, revised or re-negotiated.

The BoC ended its announcement by re-iterating that it “cannot resolve trade uncertainty or offset the impacts of a trade war” and that its focus will be to “maintain price stability for Canadians.”

This is a pointed reminder that if Scenario 2 comes to pass, the BoC would be forced to raise interest rates to combat inflation even if the economy is slowing, and the federal and provincial governments would need to pass legislation to prevent a protracted recession.

The next scheduled BoC rate announcement is June 4th, 2025.

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