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.
