Trade policy assumptions
The economic outlook presented in this Monetary Policy Report does not incorporate any new US tariffs, although it does recognize that the threat of tariffs is already affecting financial markets and business decisions. This assumption reflects a situation that is evolving rapidly, along with the high degree of uncertainty around whether wide-ranging tariffs will be imposed and the specifics of those tariffs and any possible retaliation. A detailed discussion of how the Canadian economy could be impacted if significant new tariffs were to be imposed, including an illustrative scenario, can be found in In focus: Evaluating the potential impacts of US tariffs.
Overview
Inflation in Canada has been around 2% since August 2024. Inflation rates for most major components of the consumer price index are below their historical averages, but inflation in shelter prices is elevated and is easing slowly. Inflation expectations have largely normalized.
Inflation is projected to be volatile through March, reflecting the effects of the GST/HST holiday on some goods and services. Inflation is expected to remain near the 2% target over the projection horizon.
Growth in the Canadian economy was softer than expected in the third quarter of 2024, but there are signs activity has since gained momentum despite a slowdown in population growth. Past interest rate cuts are contributing to an increase in household spending and housing activity. The labour market is still soft, and there are some signs that wage growth has slowed. The economy remains in modest excess supply.
Canadian economic growth is forecast to average 1.8% in 2025 and 2026. Household spending strengthens and is anticipated to remain robust, supported by past cuts to interest rates. Excess supply is expected to gradually dissipate over the projection.
The global economy is anticipated to grow at around 3%. Growth in US gross domestic product (GDP) has been strong and is projected to remain so in 2025. It is then anticipated to moderate in 2026. Inflation in the United States has been persistent but is expected to ease through 2025 and 2026. In the euro area, growth is subdued. In China, policy measures are fuelling economic activity in the near term, with a slowdown expected later in the projection.
Both upside and downside risks surround the outlook, and the Bank is equally concerned with inflation rising above the 2% target or falling below it. Excluding new wide-ranging US tariffs, the risks to the outlook for inflation are roughly balanced. However, US trade policy has emerged as a major source of uncertainty.
The new US administration has threatened significant tariffs on imports from its trading partners, including Canada. This has prompted discussion of retaliatory tariffs. While many details remain unknown, broad-based tariffs would severely disrupt global trade. In Canada, there are already signs that the threat of tariffs is weighing on consumer and business confidence and investment intentions. This threat has also contributed to the recent depreciation of the Canadian dollar.
In this Report, the Bank uses an illustrative scenario to explore how a hypothetical set of tariffs and countermeasures could affect economic activity and inflation in Canada. The Bank will continue to consult with other policy-makers, businesses and labour groups and will analyze new information as it becomes available. The Bank’s analysis will be updated as the situation evolves.
