Bank of Canada Hits Pause on Rate Cuts Amid Tariff Turmoil, Warns of Deep Recession Risk

Toronto, April 17, 2025 — The Bank of Canada froze its key interest rate at 2.75% on Wednesday, marking its first pause after seven consecutive rate cuts. The central bank cited major global uncertainties—particularly U.S. President Donald Trump’s sweeping tariffs—as the reason for halting its usual forward-looking economic projections.

Governor Tiff Macklem said the bank would adopt a wait-and-watch approach. “The future is really no clearer,” he said, pointing to the unpredictable nature of trade tensions. With no clarity on how long the tariffs would last or whether they might intensify, the Bank of Canada replaced its quarterly economic outlook with two possible scenarios.

In the more optimistic case, most tariffs are rolled back through negotiation, temporarily stalling growth in the second quarter before the economy recovers. Inflation in this case dips to 1.5% but eventually stabilizes near the bank’s 2% target.

The grimmer scenario paints a bleaker picture: a prolonged global trade war triggering a year-long recession in Canada, an inflation spike to 3.5% by mid-2026, rising unemployment, and even bankruptcies among exporters. Macklem warned that this could permanently shrink Canada’s economic potential and hurt its standard of living.

Despite the pause in rate cuts, analysts don’t believe the easing cycle is over. BMO’s chief economist Douglas Porter said Macklem has “clearly left the door open” for further intervention if economic conditions worsen. TD Securities’ Andrew Kelvin agreed, noting that further weakness could force the central bank’s hand.

The Bank of Canada acknowledged that recent data—including flat job growth, subdued business investment, and high inflation—highlight the toll of trade tensions. GDP is now expected to be weaker in the second quarter after a modest 1.8% rise in Q1. Inflation is forecast to temporarily fall due to lower energy prices and the repeal of carbon taxes.

Macklem emphasized flexibility: “The message here is we have got to be flexible and adaptable.” With Canadian households and businesses facing mounting uncertainty, the central bank said it stands ready to act swiftly if clearer trends emerge.