Assumptions for the outlook scenarios

Monetary Policy Report—April 2025—Canadian economy

The United States has threatened, imposed and suspended tariffs on its trading partners, including Canada. Many tariffs remain in place, and it is unclear what will happen next. This section outlines two illustrative scenarios for how US trade policy could unfold.

The assumptions and scenarios were finalized on April 11, 2025.

The Bank of Canada presents two illustrative scenarios in this Report, each with different assumptions about the future course of US trade policy. They are designed such that, when taken together, they encompass a range of trade policies and associated paths for Canadian inflation and growth of gross domestic product (GDP). These scenarios are presented in place of a base-case economic projection.

Assumptions in Scenario 1

This scenario assumes that most tariffs imposed since the trade conflict began are negotiated away, but the process is unpredictable. Uncertainty about US trade policy continues, and businesses and households remain cautious.           

Several assumptions apply in this scenario:

  • A limited number of new tariffs remain:1
    • US tariffs of 25% on imported steel and aluminum and the associated 25% tariff on $29.8 billion of Canadian imports of US goods as announced by the Government of Canada2
    • Chinese tariffs of 100% on some Canadian agricultural products as well as a 25% tariff on Canadian pork and seafood products
    • An additional 10% US tariff on Chinese goods and Chinese retaliation equivalent to an increase of 1% in its weighted average tariff rate on imports of goods from the United States
  • In Canada, tariff revenues are fully redistributed to households.
  • In the United States, half of the tariff revenues are redistributed to households.
  • Trade policy uncertainty remains elevated around the world until the end of 2026, when its effect slowly begins to fade.
    • This uncertainty weighs on demand, particularly business investment and household purchases that require longer-term financial commitments.
    • Potential output growth both globally and in Canada weakens modestly due to the impact of uncertainty on business investment, which leads to a lower capital stock (see Appendix: Potential output and the nominal neutral rate of interest).
  • World commodity prices increase from current levels. Over the scenario horizon, the per-barrel prices for oil are assumed to be US$70 for Brent, US$65 for West Texas Intermediate and US$50 for Western Canadian Select.
  • The Canadian dollar is assumed to average 70 cents US over the scenario horizon.

Assumptions in Scenario 2

This scenario assumes that the uncertainty and limited tariffs in Scenario 1 persist and other US tariffs are added. A long-lasting global trade war unfolds.3

United States

  • The United States imposes the following additional permanent tariffs:
    • a 25% tariff on the non-US content of imported motor vehicles and parts
    • a 12% tariff on imported goods, other than motor vehicles and parts, from Canada and Mexico4
    • a 25% tariff on all goods imported from all other countries
    • a 15% tariff on all goods imported from China to lift the total new tariff on China to 25%
  • Half of tariff revenues are redistributed to households.

Canada

  • Canada imposes the following additional permanent tariffs:
    • a 12% tariff on $115 billion of US goods imports
    • a 25% tariff on the US content of vehicles imported from the United States with exceptions for components made in Canada and Mexico that comply with the Canada-United States-Mexico Agreement
  • Revenues from tariffs on imported motor vehicles are fully redistributed to households while half of the revenues from other tariffs are redistributed to households.

Mexico and other countries

  • Mexico imposes:
    • a 12% tariff on imports of goods from the United States
  • All other countries impose:
    • a 25% tariff on imports of goods from the United States

Other assumptions

  • Tariffs are assumed to be permanent. As a result, potential output, both globally and in Canada, weakens substantially (see Appendix: Potential output and the nominal neutral rate of interest).
  • Over the scenario horizon, the per-barrel prices for oil are assumed to be US$60 for Brent, US$55 for West Texas Intermediate and US$40 for Western Canadian Select.
    • These prices are US$10 lower than in Scenario 1
  • The Canadian dollar is assumed to fall to 67 cents US over the scenario horizon.
    • This is 3 cents lower than in Scenario 1

Scenario 1 and Scenario 2 differ in several key tariff assumptions (Table 1).

Table 1: Tariff assumptions in each scenario
US tariffs
Scenario 1 Scenario 2
  • 10% on all Chinese goods
  • 25% on imported steel and aluminum
  • 12% on imports of goods, other than motor vehicles and parts, from Canada and Mexico
  • 25% on the non-US content of imported motor vehicles and parts
  • 25% on all goods imported from all other countries, including additional tariffs that increase the tariff rate on goods imported from China to 25%
Tariffs imposed by other countries
Scenario 1 Scenario 2
  • China—average of 1% on US imports
  • Canada—25% on $29.8 billion of US goods
  • Canada—12% on an additional $115 billion of US goods
  • Canada—25% on vehicles imported from the United States with exceptions for components made in Canada and Mexico that comply with the Canada-United States-Mexico Agreement
  • Mexico—12% on all US goods
  • All other countries—25% on all US goods

Note: For Scenario 2, the uncertainty and limited tariffs in Scenario 1 persist and other US tariffs are added. A long-lasting global trade war unfolds.

Assumptions common to both scenarios

Some economic assumptions are the same in the two scenarios.

  • Tariff pass-through: In all countries, three-quarters of the increased costs from tariffs are passed through to consumer prices within six quarters.
  • Fiscal policy: Both scenarios incorporate information from published federal and provincial budgets and fiscal updates. In addition:
    • The federal consumer carbon tax was eliminated on April 1. One additional rebate cheque is issued.
    • The proposed increase in the federal capital gains inclusion rate does not go into effect.
  • Population growth: The rate of population growth of people aged 15 and over in Canada is assumed to slow from 3.3% in 2024 to 1.2% in 2025 and then to moderate further to 0.5% in 2026. Population growth is assumed to be 0.6% in 2027.
  • Nominal neutral interest rate: The nominal neutral interest rate in Canada is estimated to be in the range of 2.25% to 3.25%. Both scenarios assume it is at the midpoint of this range (see Appendix: Potential output and the nominal neutral rate of interest).
  1. 1. For example, Canada’s $30 billion in countermeasures announced on March 4, 2025, are excluded from this scenario.[←]
  2. 2. For more details, see Department of Finance Canada, “List of products from the United States subject to 25 per cent tariffs effective March 13, 2025,” backgrounder (March 12, 2025).[←]
  3. 3. Scenario 2 is similar to the illustrative tariff scenario outlined in the January Report (see In Focus: Evaluating the potential impacts of US tariffs). However, in Scenario 2, the tariff rates on Canada and Mexico have been adjusted to be more in line with recent US government announcements.[←]
  4. 4. The White House executive order issued on April 2 indicates that goods imported from Canada and Mexico to the United States would be subject to a 12% tariff if they were deemed to not comply with the Canada-United States-Mexico Agreement. Therefore, a permanent 12% tariff for Canada and Mexico is illustrative of what could arise in the case of a long-lasting global trade war.[←]

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