This is an account of the deliberations of the Bank of Canada’s Governing Council leading to the monetary policy decision on April 16, 2025.
This summary reflects discussions and deliberations by members of Governing Council in stage three of the Bank’s monetary policy decision-making process. This stage takes place after members have received all staff briefings and recommendations.
Governing Council’s policy decision-making meetings began on April 9. The Governor presided over these meetings. Members in attendance were Governor Tiff Macklem, Senior Deputy Governor Carolyn Rogers and Deputy Governors Toni Gravelle, Sharon Kozicki, Nicolas Vincent, Rhys Mendes and Michelle Alexopoulos.
Trade uncertainty
Governing Council members began their deliberations by acknowledging that elevated uncertainty stemming from the US-led trade conflict made it impossible to project economic growth and inflation with any degree of confidence.
The protectionist shift in US trade policy has had widespread implications for the global and Canadian economies. The unpredictability of the rollout of tariff announcements led Governing Council to forego the traditional base-case forecast in the April Monetary Policy Report. Instead, two illustrative scenarios were developed to help gauge quite different but plausible outcomes for economic growth and inflation and inform monetary policy deliberations.
Governing Council did not see these as forecasts. Rather, the scenarios were viewed as two possibilities among many, spanning a wide range of paths for US trade policy.
Against this backdrop, members first discussed recent economic data to assess how the global and Canadian economies had evolved leading up to the imposition of major tariffs on imports to the United States on April 2, 2025.
International economy
Members discussed global economic developments since the January Report. They agreed that global economic growth had been on solid footing at the end of 2024, although some slowing was evident at the beginning of 2025. Inflation had been easing toward central bank targets.
In the United States, growth had begun to slow modestly after a very strong year in 2024. Members agreed it was still too early to see the impacts of tariffs on economic activity. However, consumer sentiment in the United States had worsened and surveys of US households and businesses showed a marked rise in inflation expectations likely related to tariffs. The labour market remained solid with unemployment hovering around 4% for close to a year. US consumer price index (CPI) inflation slowed to 2.4% in March from 2.8% in February.
The euro area economy expanded modestly in the first quarter of 2025, with continued weakness in the manufacturing sector. Labour market pressures had eased, and inflation had ticked down in March with inflation in services prices moderating. In China, the economy grew faster than expected at the end of 2024. Members attributed this to stronger export growth in anticipation of new tariffs, policy measures to support domestic demand and some signs that the property market may be stabilizing.
Financial markets were in turmoil at the time of the deliberations. The size and scope of the tariffs announced on April 2 were larger than what many market participants anticipated. This led to sharp repricing in equity and bond markets as investors revised their economic outlooks. Liquidity declined for a short period in the market for US Treasuries, particularly for longer-term Treasuries, given the sharp rise in volatility. Despite the large swings, there was no evidence of market dysfunction. Global oil prices declined substantially since January as prospects for global growth weakened in the face of tariffs. After being relatively stable since January, the Canadian dollar appreciated owing to the broad-based weakness of the US dollar following the tariff announcement in April.
Canadian economy and inflation outlook
The Canadian economy ended 2024 in good shape. However, Governing Council members agreed that the economy would slow in 2025 as tariffs on exports to the United States and uncertainty about trade policy were weighing heavily on business and consumer sentiment.
Members discussed incoming data on economic activity since the January Report. Final domestic demand grew solidly in the fourth quarter of 2024. However, more recent data pointed to a considerable slowdown in household spending and business investment. Survey results showed that consumer confidence had reached historic lows, and consumption appeared to be slowing. Still, members viewed the decline in retail sales in January with caution given the volatility of the data. Housing activity also slowed considerably in the first quarter of 2025. Despite lower interest rates, resale activity was down, particularly in the Toronto housing market.
In the first quarter of 2025, weakness in final domestic demand growth was expected to be substantially offset by strength in exports as companies in the United States sought to build up their inventories in anticipation of tariffs. Inventory expansion in Canada was also expected to contribute to growth. As a result, economic growth in the first quarter was expected to slow to 1.8%. Growth in the second quarter was anticipated to be much weaker.
Members discussed recent labour market data. The job market recovery that began in late 2024 appeared to have stalled as trade tensions escalated. Job postings had been slowing, and employment declined in March after being flat in February. In the Bank’s surveys, businesses indicated that they were scaling back hiring in the face of trade uncertainty. Wage growth continued to show signs of moderating.
CPI inflation was 2.3% in March. This was down from 2.6% in February but up from 1.8% at the time of the January Report. While inflation has been generally close to the 2% target since August of last year, temporary factors, such as the GST/HST holiday and a short-term boost to prices of travel tours, had caused some volatility in recent months.
Inflation in goods prices had risen from low levels at the end of last year and was around its historical average. This was due partly to the effects of the past depreciation of the Canadian dollar and a recent increase in suppliers’ prices for some goods. Elevated shelter service price inflation continued to ease gradually as lower interest rates pulled down mortgage interest costs and rental prices moderated. However, this easing did not offset the rise in prices for goods.
Short-term inflation expectations had risen because businesses and households had begun to expect that tariffs would increase prices. In contrast, long-term inflation expectations had not moved much.
Members agreed that headline inflation would decline in the near term. Lower oil prices and the elimination of the consumer carbon tax would pull CPI inflation down to about 1½% in April. Beyond that, it was difficult to predict the effect of opposing pressures on prices. Tariffs and supply-chain disruptions could pull prices up, while weaker demand could push them down. Core measures of inflation were running a little under 3%, boosted by higher goods prices. It appears that core inflation measures are also being distorted by still-high inflation in shelter services. Members agreed they would need to look carefully at all subcomponents of the CPI data to gauge the trend of underlying inflation.
Considerations for monetary policy
Governing Council members spent considerable time discussing uncertainty about US trade policy. They began by exchanging views on the two scenarios presented in the April Report, and the monetary policy implications of plausible trade policy outcomes.
The scenarios in the April Report illustrate the main channels through which trade policy would affect economic activity and inflation. In Scenario 1, most tariffs are short-lived, while uncertainty in trade policy persists for a period. This uncertainty weighs on growth, but the impact on inflation is relatively muted. In Scenario 2, tariffs are larger and permanent, which leads to a recession and pushes inflation temporarily up above 3% in 2026. In this scenario, a protracted trade conflict produces opposing forces on inflation—a weaker economy puts downward pressure on prices while higher costs from tariffs and supply-chain disruptions exert upward pressure.
Governing Council members debated where they thought the current situation was relative to the two scenarios. But with new announcements from the United States continuing over the course of their deliberations, members agreed that it was not useful to try to pinpoint the position of US trade policy given the continually shifting situation. It was nonetheless clear that outcomes closer to Scenario 2 would present a difficult trade-off for monetary policy between supporting growth and fighting inflationary pressures.
To gain a better understanding of the risks embedded in these scenarios, members found it useful to distinguish between two layers of uncertainty. The first layer—uncertainty about the path for US trade policy—was reflected in the decision to use scenarios rather than a base-case projection. The second layer was uncertainty about the impacts of tariffs. Members discussed the ways the model assumptions used in the scenarios could over- or underestimate the economic and inflation outcomes of different scenarios:
- The effects of tariffs on economic activity and inflation could be more pronounced, particularly in Scenario 2, where the size of the shock is unprecedented. Canadian exports subject to tariffs could be more sensitive to lower demand from the United States than assumed, leading to weaker growth in Canada. Lower demand for Canadian exports could affect business investment, employment, household spending and housing more than anticipated, putting additional downward pressure on inflation. These effects could occur more quickly than assumed, and the impact could be more severe.
- Financial volatility—such as the rapid repricing of assets that followed the announcement of tariffs on April 2—could lead to a sharp tightening of financial conditions or, worse, a breakdown in the capital and credit allocation process, prompting a larger decline in economic activity. Rising financial stress among businesses and households could lead to a larger pullback in investment, hiring and spending.
- On the other hand, trade policy could stabilize, through the signing of new trade deals for example, and uncertainty could dissipate sooner than in Scenario 1. This could reduce the negative effect of uncertainty on business investment and consumer spending, and lower the downward risk on inflation.
- Targeted fiscal policy support in addition to the redistribution of tariff revenues could lessen some of the negative impacts of US tariffs on economic activity. In addition, long-term structural impediments to growth in Canada, such as interprovincial trade barriers, could be removed. This would have an impact on growth and inflation, although significant effects would only be seen in the longer term.
- Businesses could pass on higher costs to consumer prices faster than anticipated. If this happens and inflation spreads to other goods and services, then—given Canadians’ recent experience with high inflation—inflation expectations could drift up faster than assumed. If this were to lead to an increase in medium- and long-term inflation expectations, it could lead to higher inflation and higher labour costs.
- The reordering of international trade relationships could disrupt global supply chains. These disruptions could put further upward pressure on costs and, ultimately, prices.
Governing Council members agreed that the two layers of uncertainty—uncertainty related to trade policy and uncertainty related to the impact of tariffs—made it difficult for them to assess the probabilities associated with these risks materializing. Members were hopeful that in the future, more clarity about US trade policy and more incoming data to assess the economic impacts of the trade conflict, could narrow the range of scenarios.
Policy decision
Members had an extensive discussion on the various risks and uncertainties that could affect the economy and inflation, and the appropriate stance for monetary policy at this time, given the unusually large range of unknowns clouding the outlook.
Members acknowledged that cuts over the past seven meetings had reduced the policy interest rate substantially. These cuts were still working their way through the economy, which was contributing to stronger economic activity while keeping inflation close to 2%. In both January and March, Governing Council cut the policy interest rate by 25 basis points as trade tensions with the United States intensified and uncertainty grew. These cuts brought the policy interest rate to the middle of the Bank’s estimate of the neutral rate.
Since March, the erratic tariff announcements by the US administration had added to uncertainty. As they did at their March meeting, Governing Council members debated two options for the April monetary policy decision: maintain the policy interest rate or reduce it by 25 basis points.
Some members took the view that with the economy on solid footing coming into 2025, and with the cuts to the policy interest rate at the past two meetings, Governing Council should keep the policy interest rate unchanged while they gained more information on tariffs and their impacts. Continuing to lower the policy interest rate at this meeting could end up being premature in a context where past cuts were still working their way through the economy and where upward pressure on inflation from tariffs could come through quickly. In discussing this option, members highlighted that the uncertainty around US tariff policy and countermeasures and other policy responses by Canada and other countries merited a wait-and-see approach.
Others expressed concern that recent surveys of business and consumer sentiment, as well as softer data on jobs, housing, and retail trade pointed to a weakening economy. In addition, following the tariff announcements on April 2 and subsequent financial market turmoil, concerns about a deeper US recession and global economic slowdown increased. In this context, they viewed a further reduction in the policy interest rate to support the economy as appropriate given that the near-term inflation risks were muted. In discussing the merits of this option, members noted that the initial impact of tariffs represented a one-time rise in the level of consumer prices. As long as medium- to long-term inflation expectations remained anchored, they had the flexibility to reduce the policy interest rate further to support growth. They also highlighted the need for timely action given the lags in the transmission of monetary policy actions to the economy and inflation.
While there were differences in views, everyone agreed there was a great deal of uncertainty and the situation could change quickly. They also agreed they should be less forward looking than usual. Against this backdrop, members reached a consensus to maintain the policy interest rate at 2.75%.
Members agreed they would continue to refine and evaluate different trade policy scenarios. They will assess incoming data, announcements related to tariffs, and policy responses. They also agreed to maintain a robust survey and outreach plan to better understand in real time how the economy is adapting.
Governing Council agreed to continue to focus on assessing the opposing pressures on inflation from weaker demand and higher costs. In doing so, they would pay particular attention to:
- how much higher tariffs reduce demand for Canadian exports
- how lower demand for exports impacts business investment, employment and household spending
- how much and how quickly cost increases are passed on to consumer prices
- how inflation expectations evolve
If new information pointed clearly to one side or the other of these opposing forces on inflation, Governing Council would be prepared to act decisively. Members agreed that in the face of tariffs, monetary policy should support the economy while maintaining its primary focus on price stability.