The Bank of Canada announced Wednesday that it is keeping its key interest rate unchanged amid high economic uncertainty as U.S. President Donald Trump threatens 100 per cent tariffs on Canadian goods.
In a press conference, governor Tiff Macklem acknowledged that the future of trade in North America remains unpredictable, but concluded that the current interest rate of 2.25 per cent is “appropriate” based on the bank’s economic outlook.
“Our forecast for economic growth and inflation in Canada,” Macklem said, “has not changed significantly since our October projection.”
Most economists correctly predicted policymakers would stick to their message from October, when they signalled no further cuts were on the horizon. Many also believe the bank will remain on the sidelines for the rest of the year, maintaining the current key rate.
Macklem emphasized that elevated uncertainty makes it difficult to forecast the future path for rates and whether the next move will be a cut or hike.
“We are monitoring risks closely. If the outlook changes, we are prepared to respond.”
Wednesday’s decision comes during a tumultuous month for geopolitics.
Trump’s threats to seize Greenland have intensified after he captured former Venezuelan president Nicolás Maduro. Last weekend, he also said he would impose 100 per cent levies on Canada if Prime Minister Mark Carney struck a deal with China.
Carney brushed off the tariff threats, saying he expects the upcoming Canada-United States-Mexico Agreement (CUSMA) negotiation to be “a robust review.”
Macklem said on Wednesday that the outcome of the CUSMA review “is an important risk to the outlook.”
Asked whether he believes the level of uncertainty the economy is experiencing today is higher than it was a year ago, Macklem simply said “it’s high.”
“It is important to step back from the daily noise,” he continued. “Some things are clear. It’s clear that the era of open rules-based trade with the United States is over.”
Macklem said the economy already appears to be adjusting to major changes in our relationship with the U.S.
Since the last rate announcement in December, the data have pointed to a weak but resilient economy.
The unemployment rate rose to 6.8 per cent last month as more people searched for work. The central bank expects economic growth to be “modest” in the short term as population growth slows and Canada adapts to U.S. protectionism.
Meanwhile, the annual rate of inflation rose to 2.4 per cent in December from 2.2 per cent the month prior.
Excluding the effect of changes in taxes, however, inflation has been slowing since September. The Bank of Canada expects inflation to remain close to its target of two per cent going forward.
“It’s clearly going to require a material shift in the outlook to prompt a change in rates,” BMO economist Douglas Porter said in a note to clients on Wednesday, “but given the highly uncertain trade backdrop, a material shift is quite possible.”
