Bank of Canada to tread carefully amid uncertain outlook

Summary

The Bank of Canada (BoC) last week held its policy rate steady at 2.75%, its first pause since it began its easing cycle in June of last year. At the same time, the BoC highlighted elevated uncertainty and offered very limited future policy guidance.

In a significant departure from its typical approach, the BoC refrained from offering a base-case forecast, but instead offered outlooks that considered the impact of different U.S. trade policies. In a “modest tariff” scenario, Canada's economy briefly stalls while inflation remains well-behaved. In contrast, in an “aggressive tariff” scenario, Canada's economy experiences a protracted recession, while inflation briefly spikes above 3% before receding thereafter.

Our own outlook leans closer to the aggressive tariff scenario, in that we expect most of the tariffs that have already been implemented to remain in place. We think this type of scenario favors more gradual easing (given the uncertainty created by a spike of inflation) but more pronounced easing overall (given the likely sharp slowdown of the Canadian economy).

Against this backdrop, our base case is for BoC rate cuts to continue at a once-per-quarter pace, and we anticipate 25 bps reductions at the June, September and December announcements, for a policy rate low of 2.00%. We do however see the risks as tilted even later easing, in which case we expect the BoC's policy rate would not reach a low until early 2026.

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