Overview
Monetary Policy Report—April 2025
The Canadian economy ended 2024 strong. However, the escalating trade conflict is diminishing growth prospects. While tariffs are expected to increase price pressures, removing the consumer carbon tax has lowered energy prices. The unpredictability of US trade policy, and the speed and magnitude of the shifts, are making the economic outlook very uncertain.
In February and March 2025, the United States repeatedly threatened, imposed and then suspended tariffs on Canada and Mexico. Significant US tariffs remain in place, particularly on steel, aluminum and motor vehicles. Then, on April 2, the United States announced high and broad-based tariffs on nearly all its other trading partners. One week later, on April 9, it reduced most of those tariffs for 90 days to a 10% universal rate. This universal tariff does not apply to Canada and Mexico. There is a great deal of uncertainty around what will happen next.
Trade policy uncertainty is making it difficult for households, businesses and governments to plan. It is also difficult to know how the tariffs will affect the economy. Consequently, it is unusually challenging to project economic activity and consumer price index (CPI) inflation in Canada and globally.
Instead of a base-case projection, this Report contains two illustrative scenarios that consider different US trade policies. In addition, the Risks section focuses on the uncertainty related to how tariffs will impact the economy. The Bank of Canada has chosen this approach to better manage the risks in this highly uncertain environment.
Two layers of trade uncertainty
Two layers of trade uncertainty are affecting the outlook for the Canadian economy. The first layer is around US trade policy. It is difficult to know:
- what tariffs will ultimately be imposed
- the extent of countermeasures from Canada and other countries
- how long the tariffs will last
- the outcome of future trade negotiations
The second layer of trade uncertainty relates to how households, businesses and governments will react and adapt to tariffs. This layer of uncertainty is particularly relevant given the unprecedented scale of the shift in US trade policy.
To address the first layer of uncertainty, this Report presents two illustrative scenarios for how US trade policy could unfold. These scenarios are designed such that when taken together, they encompass a range of possible trade policies.
The details of the scenarios, which were finalized on April 11, are explored in the Assumptions for the outlook scenarios section. The standard tables and charts the Bank uses to break down the projection for inflation and contributions to growth in gross domestic product (GDP) have been simplified and are presented in the Outlook section.
To address the second layer of uncertainty, the Risks section focuses on how tariffs could impact the economy. For example, the degree to which prices will rise due to tariffs and supply chain disruptions is unclear. It is also unclear how much tariffs will weaken economic activity and subsequently weaken inflation.
Summary of the outlook
The GST/HST holiday has caused inflation to fluctuate in recent months. When the tax holiday period is excluded, inflation rose from 1.9% in November 2024 to 2.3% in March 2025. CPI inflation outside of shelter services has risen to around its historical average.
Growth in the Canadian economy was stronger than expected in the second half of 2024 but is estimated to have slowed in the first quarter of 2025. Growth in consumption has eased, reflecting both unsustainable strength in the fourth quarter of 2024 and increased uncertainty about job prospects—particularly in industries relying on international trade. The threat of tariffs pulled trade forward, which boosted both exports and imports.
There is considerable uncertainty around the evolution of US trade policies and their impact on the economy. As a result, this Report considers two illustrative scenarios that can be summarized as follows:
- Scenario 1: Most tariffs imposed since the trade conflict began are negotiated away, but the process is unpredictable. Uncertainty about trade policy continues until the end of 2026.
- Scenario 2: The uncertainty and limited tariffs in Scenario 1 persist, and other US tariffs are added. A long-lasting global trade war unfolds.
In Scenario 1, global and Canadian growth weaken temporarily before picking up. Inflation in Canada falls to around 1.5% for one year, mostly reflecting the removal of the consumer carbon tax. It then returns to the 2% target.
In Scenario 2, a sharp global slowdown and an increase in inflation occur, especially in the United States. In Canada, a significant recession ensues, and inflation temporarily rises above 3% in mid-2026 before returning to the 2% target.
Taken together, the scenarios frame many plausible paths for Canadian inflation and GDP growth, but uncertainty about how the economy would respond to tariffs is not entirely captured in these scenarios. These uncertainties are treated as risks.
The Bank will continue to monitor developments in the trade conflict, assess the implications for Canadian inflation and provide updates as the situation evolves.