On April 16 the Bank of Canada announced it was holding its key policy rate, which directly impacts interest rates, at 2.75%. This was the first pause in interest rates after it announced seven consecutive interest-rate cuts.
Financial markets and analysts were split on whether the Bank of Canada should deliver another quarter-point interest-rate cut or pause it.
The Bank of Canada also said that because of U.S. President Donald Trump’s global trade war, it was unable to provide regular economic forecasts. The central bank noted that the “unpredictability of tariffs has increased uncertainty, diminished prospects for economic growth, and raised inflation expectations.”
Instead of providing inflation and gross domestic product (GDP) forecasts, it provided two possible scenarios of what could happen during a trade war with the U.S.
In the first scenario, Canadian growth weakens with inflation hovering around its 2% target. In the second scenario, a prolonged trade war results in Canada’s economy falling into a recession in 2025 with inflation rising temporarily above 3% in 2026. However, because of President Trump’s wavering trade policies, these scenarios could change.
Should the Bank of Canada Have Lowered Interest Rates?
In light of an unprecedented trade war with the U.S. and the odds of a global recession increasing, the question remains as to whether or not the Bank of Canada should have left its key lending rate unchanged or lowered it for an eighth consecutive time.
Those in favour of an interest-rate pause point to Canadian inflation being at the midpoint of the neutral rate range. This is the point where monetary policy is neither energizing nor restraining economic growth. Inflation is also near or at its 2% target.
Those on the other side of the fence question the Bank of Canada’s decision. Inflation may be where the Bank of Canada wants it but because of economic uncertainty, that could change in an instant. Damaging tariffs and rising inflation could significantly undermine business and consumer sentiment, consumer spending, and business investment.
Ongoing economic uncertainty, which could last for months if not quarters, could force consumers to reign in their spending and businesses to cut back on investing. This could have a big impact on profitability.
With many saying the Bank of Canada was late to the table with lowering interest rates in the first place, why take a wait-and-see approach again, and not just make another interest rate cut? After all, it’s quite possible the Canadian economy is already in a recession.
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Was the Bank of Canada right to hold interest rates at 2.75% or should it have cut it to 2.50%? The next interest rate decision is not until June 4. Will this give the Bank of Canada enough time to see how a trade war with the U.S. is impacting the Canadian economy? Ask the trading experts at Learn-To-Trade.com.
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