Considerations for monetary policy
As they weighed the current stance and path of monetary policy, Governing Council members discussed the risks and uncertainties facing the Canadian economy.
US trade policy had become somewhat more concrete in the weeks leading up to the deliberations, but US tariff rates had increased substantially since President Trump took office and the uncertainty around trade seemed likely to endure. Even for the agreements in place, details were yet to be finalized, durability was not assured and new product-specific tariffs were still being threatened. At the time of deliberations, a trade deal between Canada and the United States was still being negotiated. Members agreed that the three scenarios presented in the MPR provided a useful framework for assessing the impacts of different tariff scenarios on the Canadian economy.
The three scenarios presented a range of outcomes for Canadian economic growth. In all three scenarios, inflation would remain within the band, with headline inflation peaking in the escalation scenario at around 2½%. While this provided some reassurance that price pressures would be contained, members judged the risks to inflation to be elevated given evident pressures on underlying inflation and the uncertainty around the impacts that tariffs and trade disruptions could have on Canada’s economy over time.
The second layer of uncertainty—how households, businesses and governments will react and adapt to tariffs—was the focus of considerable discussion among members of Governing Council. They assessed how the four key indicators they were watching had evolved.
First, data on exports over recent months clearly showed a sharp drop that reflected both the payback for the pull-forward of trade activity in previous months, and lower US demand for Canadian exports as a result of tariffs. In the current tariff scenario, exports would stabilize in the second half of the year before growing again in 2026, albeit on a lower path than their pre-tariff trajectory. The shape of a future agreement on trade between the United States and Canada would determine how much the demand for Canada’s exports would be affected. In particular, new sectoral tariffs could be imposed, reducing Canada’s exports and raising costs further.
Second, members agreed that the spillovers from lower export demand into business investment, employment and household spending had been limited so far. Members noted that consumer confidence, while still low, had improved and become less of a drag on consumption and housing activity. They also discussed the extent to which spending by all levels of government could partially offset the weakness in sectors affected by tariffs.
Third, members agreed it was too early to tell how much and how quickly cost increases from tariffs and trade disruptions would be passed on to consumer prices. Members acknowledged that these costs are difficult to evaluate and could add upward pressure to consumer prices over time. Whether these upward pressures will be counterbalanced by the downward pressures from easing growth in unit labour costs and excess supply in the economy will require ongoing assessment.
Fourth, members noted that recent survey data on inflation expectations showed longer-term consumer and business expectations to be well anchored. However, given uncertainty about how much costs could increase and what future pass-through to consumer prices could be, members agreed to continue to watch the evolution of inflation expectations closely.
Overall, members agreed that it was still too early to assess how tariffs and the rewiring of trade would affect economic activity and inflation in Canada.
Against this backdrop, members discussed the appropriate role for monetary policy in the context of a shock that affects both supply and demand. They agreed that US trade actions were a structural shock to the global and Canadian economies. Monetary policy works to control inflation by influencing demand and is not well suited to shocks that push prices up because of a decline in aggregate supply. In this context, there was some debate about what monetary policy could do to support the economy through this period of upheaval.
Some members held the view that, having reduced the policy interest rate to the middle of the Bank’s estimated range of the neutral interest rate, and the economy showing some resilience to US tariffs, the Bank may have already provided sufficient support to aid in this transition. Businesses and consumers were adapting, and growth in sectors of the economy less tied to US trade actions could support the overall economy, albeit on a lower path of economic activity. Given the lagged effects of monetary policy, there was a risk that further easing might take effect only as demand was recovering, which could add to price pressures.
Others highlighted that further monetary policy support would likely be needed given the estimated amount and persistence of slack in the economy, particularly if the labour market softened further. If incoming data showed that the upside risks to underlying inflation were not materializing, there could be more room for monetary policy to ease further, reducing economic slack and supporting the economy’s adjustment to the reconfiguration of global trade.
Given the uncertainty around estimates of slack and underlying inflation, and how households, businesses and governments will adapt to tariffs, members agreed they would need to wait for more clarity before drawing firm conclusions. Members agreed it was important to emphasize that the unusual degree of uncertainty meant that they needed to be looking over a shorter horizon than usual in their monetary policy deliberations.
Finally, regarding monetary policy operations, Governing Council members noted that settlement balances had continued to come down. This had not created sustained pressures on the Canadian Overnight Repo Rate Average (CORRA). As previously announced, term repo operations were ramping up and settlement balances were on track to settle in a range of approximately $50 billion to $70 billion.
