The Bank of Canada has opted to keep its target for the overnight rate unchanged at 2.75%. The Bank Rate stands at 3%, and the deposit rate is maintained at 2.70%. This decision comes amid a backdrop of international trade policy shifts and increased uncertainty impacting economic forecasts.

A significant factor affecting the outlook is the evolving trade policy stance in the United States. The resulting uncertainty has dampened economic growth expectations and raised concerns about inflation. The Bank's April Monetary Policy Report presents two potential scenarios regarding US trade policy. In the first scenario, ongoing uncertainty with limited tariffs causes a temporary weakening in Canadian economic growth, though inflation remains close to the 2% target. In a more severe scenario, a prolonged trade conflict could lead to a recession in Canada by year-end, temporarily pushing inflation above 3% next year.

In recent months, global economic growth showed strength, particularly at the end of 2024, with inflation easing towards central targets. However, the prospects have begun to weaken due to tariffs and continued uncertainties. The US economy is showing signs of a slowdown amidst rising policy uncertainty, while the euro area has reported modest growth with challenges in the manufacturing sector. China's economic activity also indicated a minor slowdown after strong performance late last year.

Financial markets have experienced significant volatility due to tariff announcements and related tensions, further amplifying uncertainties. Oil prices have decreased significantly since January, reflecting tempered outlooks for global growth. The Canadian dollar has appreciated due to a weaker US dollar.

Domestically, the Canadian economy is also feeling the impact of trade tensions. Consumer and business confidence has been affected, with a weakening in consumption, residential investment, and business spending. The labor market recovery has been disrupted, as evidenced by declining employment in March and businesses planning to reduce hiring. Wage growth has shown signs of moderation as well.

Inflation measured 2.3% in March, down from February but above the 1.8% recorded during January's Monetary Policy Report. This increase results from a rebound in goods price inflation and the cessation of the temporary suspension of GST/HST. The removal of the carbon tax from April is expected to lower CPI inflation for the next year, while lower global oil prices are likely to suppress inflation in the near term. Nonetheless, tariffs and supply chain disruptions could drive certain prices upward, contingent on the tariff developments and cost pass-through to consumers.

Governing Council is set to carefully evaluate the balance between downward pressures on inflation from a weak economy and upward pressures from rising costs, focusing on maintaining confidence in price stability. They will proceed with caution, paying close attention to risks and uncertainties, such as the impact of tariffs on Canadian exports, their effects on investment, employment, and consumption, the pass-through rate of cost increases, and the progression of inflation expectations.

The Bank emphasizes that while monetary policy cannot resolve trade-related uncertainties or counteract trade wars' impacts, it remains committed to price stability for Canadians during this period of global challenges.

The Bank of Canada's upcoming announcement regarding the overnight rate target is scheduled for June 4, 2025, with the next Monetary Policy Report to be released on July 30, 2025.