Bank of Canada ends cut streak, holds interest rates on trade uncertainty

Jenny Wang

April 16, 2025

Key takeaways

The Bank of Canada ends the streak at seven consecutive rate cuts, policy interest rate remains at 2.75%.
Unpredictability of U.S. trade policy has increased uncertainty, diminished economic growth prospects and raised inflation expectations.
The long-term strategic asset allocation of our portfolios remains sound as we return our tactical overweight to equities to neutral in portfolios with a tactical asset allocation overlay.

In its April announcement, the Bank of Canada (BoC) decided to hold its policy interest rate at 2.75%. It cites uncertainty stemming from the unpredictability of U.S. trade policy making it more difficult to forecast economic growth and inflation for its decision to proceed more cautiously. As such, the BoC’s latest Monetary Policy Report (MPR) presents two scenarios for Canada’s outlook, split by the harshness of U.S. trade policy.

Scenario one shows growth weakening temporarily and inflation staying near the Bank’s 2% target as tariffs are scaled back. The second scenario shows Canada falling into recession and has inflation rising to over 3% on a protracted trade war. To illustrate the uncertainty of the situation, the Bank qualified its approach by saying “Many other trade policy scenarios are possible. There is also an unusual degree of uncertainty about the economic outcomes within any scenario, since the magnitude and speed of the shift in U.S. trade policy are unprecedented.”

Bank of Canada, everyone, grasping for clarity

Under MPR projection scenario one, Canadian gross domestic product (GDP) would stall to zero in 2025, then average approximately 1.6% through to the end of 2027. Inflation would dip temporarily (more so due to the removal of the consumer carbon tax) before returning to hovering around the 2% target longer term.

Scenario two would have GDP sink 2% in 2025, then average approximately 1.8% through to the end of 2027. Inflation would stay near the 2% target before spiking above 3% in 2026 (as trade disruptions take hold) and then return to hovering around the 2% target longer term.

Of note, inflation was 2.3% in March, coming in lower than the 2.6% February reading, but higher than the 1.9% January reading (likely due to the end of the GST/HST suspension).

Taken from the BoC’s statement, “the economy is slowing as tariff announcements and uncertainty pull down consumer and business confidence. Consumption, residential investment and business spending all look to have weakened in the first quarter. Trade tensions are also disrupting recovery in the labour market. Employment declined in March and businesses are reporting plans to slow their hiring.”

Furthermore, “in the United States, the economy is showing signs of slowing amid rising policy uncertainty and rapidly deteriorating sentiment, while inflation expectations have risen. In the euro area, growth has been modest in early 2025, with continued weakness in the manufacturing sector. China’s economy was strong at the end of 2024 but more recent data shows it slowing modestly.”

Overall, we expect central banks will deliver more easing (more interest rate cuts) than what financial markets have currently priced in.

Returning to a neutral view on equities vs. fixed income and cash

Financial markets have been hit with major volatility as investors try to come to terms with what tariffs and a prolonged trade war could mean for businesses and economic growth globally.

At this time, we continue to emphasize underlying strategies that give our portfolios access to high-quality companies with strong balance sheets, competitive advantages, and proven margin resilience during times of economic stress.

Diversification remains a powerful tool in portfolio construction—our strategic allocation across asset classes, sectors, and geographies helps cushion portfolios against area-specific downturns while positioning to capture growth across various market segments.

While much remains uncertain, we will continuously monitor the evolving economic and market landscape to determine if strategic and tactical adjustments are needed to adjust the positioning of your portfolio for long-term growth.

That said, in our portfolios with a tactical asset allocation overlay, we recently removed our tactical overweight to equities and are now neutrally positioned in equities overall relative to fixed income and cash. As evidenced in the BoC’s comments, trade tensions have generated significant uncertainty to the global economic and financial market outlook. Given recent developments and the unpredictability of the path forward, returning portfolios to their long-term strategic asset allocations is warranted.

The BoC’s next interest rate announcement is scheduled for June the 4^th.

Jenny Wang

Jenny Wang, CFA, MA Economics, is a Portfolio Manager with the Multi-Asset Management Team. She is a member of the total portfolio management sub-team and her primary focus is on fixed income investments.

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