Bank of Canada Holds Rates Steady In The Face Of Tariff Uncertainty–More Rate Cuts Coming

The Bank of Canada held its benchmark interest rate unchanged at 2.75% at today’s meeting, as expected by half of the market, to mark the first hold following 225 basis points of cuts in seven consecutive decisions. The governing council noted that the unpredictability of the magnitude and duration of tariffs posed downside risks to growth and lifted inflation expectations, warranting caution regarding the continuation of monetary easing.

The higher uncertainty stemmed from the United States’ lack of a clear tariff path, prompting the BoC Governing Council to present two economic scenarios in its latest Monetary Policy Report. Should the US limit the scope of its tariffs on Canada, the BoC expects growth to temporarily weaken and inflation to hold near the 2% target. Should the US proceed with an all-out trade war with Canada and China, the BoC has pencilled in a recession this year, and inflation rising temporarily above 3% next year.

Of course, as the Bank stated in its press release, “Many other trade policy scenarios are possible. There is also an unusual degree of uncertainty about the economic outcomes within any scenario, since the magnitude and speed of the shift in US trade policy are unprecedented.”

The statement says, “Serial tariff announcements, postponements, and continued threats of escalation have roiled financial markets. This extreme market volatility is adding to uncertainty. Oil prices have declined substantially since January, mainly reflecting weaker prospects for global growth. Canada’s exchange rate has recently appreciated as a result of broad US dollar weakness.”

The Bank says in these very unusual times, “In Canada, the economy is slowing as tariff announcements and uncertainty pull down consumer and business confidence. Consumption, residential investment and business spending all look to have weakened in the first quarter. Trade tensions are also disrupting recovery in the labour market. Employment declined in March and businesses are reporting plans to slow their hiring. Wage growth continues to show signs of moderation.

Inflation was 2.3% in March, lower than in February but still higher than 1.8% at the time of the January Monetary Policy Report (MPR). The higher inflation in the last couple of months reflects some rebound in goods price inflation and the end of the temporary suspension of the GST/HST. Starting in April, CPI inflation will be pulled down for one year by the removal of the consumer carbon tax. Lower global oil prices will also dampen inflation in the near term. However, we expect tariffs and supply chain disruptions to push up some prices. How much upward pressure this puts on inflation will depend on the evolution of tariffs and how quickly businesses pass on higher costs to consumers. Short-term inflation expectations have moved up, as businesses and consumers anticipate higher costs from trade conflict and supply disruptions. Longer-term inflation expectations are little changed.

Governing Council will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. Our focus will be on ensuring Canadians continue to have confidence in price stability through this period of global upheaval. This means we will support economic growth while ensuring that inflation remains well-controlled.

The Governing Council will proceed carefully, paying particular attention to the risks and uncertainties facing the Canadian economy. These include the extent to which higher tariffs reduce demand for Canadian exports, how much this spills over into business investment, employment, and household spending, how much and how quickly cost increases are passed on to consumer prices, and how inflation expectations evolve.

Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war. What it can and must do is maintain price stability for Canadians.”

Bottom Line

The US is determined to impose worldwide tariffs, disproportionately hitting Canada, Mexico, and China, the US’s top trading partners. This is a misguided neo-Mercantilist policy. Mercantilism assumes that the global economic pie is fixed, so if one country prospers, another must fail. This idea of a zero-sum game was debunked in the 18th century by Adam Smith and others who showed that if countries have a competitive advantage in various products and services, all are better off by producing and trading those products with the rest of the world. It is not a zero-sum game. The economic pie grows with trade. This was the idea behind globalization and the USMCA free trade agreement.

Given Canada’s vulnerability to tariffs, the economy will suffer more than the US, which has a relatively closed economy (where exports are a small proportion of GDP). Prices will rise depending on the duration and size of the coming tariffs, but mitigating the inflation will be the weakness in economic activity. Stagflation, a buzzword from the 1970s, is back in the lexicon.

We expect the BoC to resume cutting the policy rate in 25-bps increments until it reaches 2.0%-to-2.25% this summer, triggering a rebound in home sales. Layoffs and spending cuts will dampen sentiment, but lower interest rates will bring buyers off the sidelines. Housing inventories have risen sharply with new condo supply and a marked rise in the new listings of existing homes, and home prices are falling.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Global Tariff Uncertainty Sidelines Buyers

Canadian existing home sales plunged last month as tariff concerns again mothballed home-buying intentions. Consumer confidence has fallen to rock-bottom levels as many fear the prospect of job losses and higher prices.

According to data released today by the Canadian Real Estate Association, existing home sales declined by 4.8% month-over-month. Along with declines in the three previous months, national home sales are now down 20% from their recent high recorded last November.

“Up until this point, declining home sales have mostly been about tariff uncertainty. Going forward, the Canadian housing space will also have to contend with the actual economic fallout. In short order we’ve gone from a slam dunk rebound year to treading water at best,” said Shaun Cathcart, CREA’s Senior Economist.

While the largest of these declines has been seen in Ontario and British Columbia, sales have been down over the last few months in all but a handful of small markets across the country.

On a non-seasonally adjusted basis, the overall Canadian sales total for March 2025 fell 9.3% year-over-year and was the lowest for that month since 2009.

New Listings

New supply moved up by 3% month-over-month in March. Combined with the decrease in sales, the national sales-to-new listings ratio fell to 45.9% compared to 49.7% in February. The March level for this measure of market balance is the lowest since February 2009. The long-term average for the national sales-to-new listings ratio is 54.9%, with readings between 45% and 65% generally consistent with balanced housing market conditions.

At the end of March 2025, 165,800 properties were listed for sale on all Canadian MLS® Systems, up 18.3% from a year earlier but still below the long-term average (around 174,000 listings) for this time of year.

“While the trend of falling monthly sales has been observed across Canada over the last few months, there are still many regions where sales are high, inventory is near record lows, and prices are rising,” said Valérie Paquin, newly installed Chair of CREA’s 2025-2026 Board of Directors. “There are also parts of the country with historically low sales and the highest inventory levels in a decade or more.”

At the end of March 2025, there were 5.1 months of inventory nationwide, the highest level since the early months of the pandemic. The long-term average for this measure is five months of inventory.

Home Prices

The National Composite MLS® Home Price Index (HPI) declined by 1% from February to March 2025, marking the largest month-over-month decrease since November 2023.

The renewed price softening was most notable in British Columbia and Ontario’s Greater Golden Horseshoe. Prices have continued to push higher across much of the Prairies, Quebec, and the East Coast.

The non-seasonally adjusted National Composite MLS® HPI was down 2.1% compared to March 2024.

The non-seasonally adjusted national average home price was $678,331 in March 2025, down 3.7% from March 2024.

Bottom Line

Before the tariff threats emerged, the housing market was poised for a strong rebound as the spring selling season approached.

Unfortunately, the situation has only deteriorated as business and consumer confidence have fallenen sharply. While the first-round effect of tariffs is higher prices as importers attempt to pass off the higher costs to consumers, second-round effects slow economic activity, reflecting layoffs and business and household belt-tightening.

The Bank of Canada will undoubtedly come to the rescue this year by further slashing interest rates. This is particularly important for Canada, where interest-rate sensitivity is far higher than in the US. But traders are betting that the odds of another 25 bps rate cut tomorrow are no better than even.

The economy is slowing, and inflation fell more than expected in March. Next month’s inflation data are also likely to improve, reflecting the elimination of the carbon tax. This keeps the possibility of an April rate cut open, but even if the Bank of Canada takes a pass this month, we estimate they will cut the overnight rate three more times this year, taking it down 300 bps from its peak last year. This will finally spur buyers off the sidelines, but the timing of this rebound is more uncertain than usual, given the chaos in the White House.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Weaker Than Expected Inflation May Not Be Enough to Trigger Another Bank of Canada Rate Cut Tomorrow

Canadian consumer prices rose 0.3% in March (or remained flat when seasonally adjusted), which was lower than expected, reducing the annual inflation rate by 0.3 percentage points to 2.3%. This decrease in headline inflation followed the complete removal of the GST holiday in March.

There was a significant drop in travel tour prices and airfares compared to the previous year, as Canadians reduced their travel to the U.S. during peak times. Additionally, gasoline prices fell by a modest 1.8%, with further declines expected in April, likely bringing the headline inflation rate below 2%.

The core measures largely met expectations last month, with the trimmed rate decreasing moderately to 2.8% and the median rate holding steady at 2.9% year-over-year. Although these annual numbers remain high, the monthly results were more encouraging, increasing by just 0.1% month-over-month on a seasonally adjusted basis. Moreover, their three-month trend eased to below 3%.

Prices excluding food and energy dipped slightly, reducing the traditional measure of core inflation to 2.4% from 2.9%. Travel tour costs dropped 8% month-over-month (or 4.7% year-over-year), and airfares fell 12% year-over-year. Cellphone service costs also decreased by 7% year-over-year. March saw the beginning of some Canadian counter-tariffs, leading to price increases in areas like sporting equipment, which rose 12.2% year-over-year. However, declines in travel and gasoline costs overshadowed these price upticks.

Shelter costs also showed signs of easing—rents slowed to 5.1% year-over-year from 5.8%, and mortgage interest costs reduced to 7.9% from 9.0%.

Bottom Line

This report will reinforce the Bank of Canada’s cautious stance on easing to mitigate the impact of tariffs. Canada experienced a break in rising inflation in March due to lower travel costs. The inflation impact of the trade war differs for Canada compared to the U.S., as Canadian tariffs are lighter, and the domestic economy is under more significant pressure.

The strengthening Canadian dollar helps reduce import prices, addressing one of the Bank of Canada’s inflation concerns. Gasoline prices fell sharply on April 1 following the removal of the carbon tax. They continued to decline due to dropping global oil prices, which may lead to a significant decrease in headline inflation next month. Despite these conditions potentially signalling a favourable situation for the BoC to cut rates, core inflation measures are still close to 3%, and ongoing trade war dynamics complicate policymaking decisions.

The odds of a ninth rate cut tomorrow are about even. Recent reports suggest that business and consumer confidence has deteriorated and that spending is slowing. Nevertheless, the central bank remains concerned about the inflationary impact of tariffs.

Even if the Bank does not cut rates in April, we will likely see three more 25-basis-point cuts this year, bringing the overnight rate down to 2.0%—300 bps lower than its peak last year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Weak Canadian Job Creation Is The First Fallout From The Trade War

Today’s Labour Force Survey for March was weaker than expected. Employment decreased by 33,000 (-0.2%) in March, the first decrease since January 2022. The decline in March followed little change in February and three consecutive months of growth in November, December and January, totalling 211,000 (+1.0%).

The employment rate—the proportion of the population aged 15 and older—fell 0.2 percentage points to 60.9% in March. This partially offsets an increase of 0.3 percentage points observed from October 2024 to January 2025.

Private sector employment fell by 48,000 (-0.3 %) in March, following little change in February and a cumulative increase of 97,000 (+0.7%) from November 2024 to January 2025. On a year-over-year basis, the number of employees in the private sector was up by 175,000 (+1.3%).

Public sector employment was little changed for a third consecutive month in March, up 92,000 (+2.1%) compared with a year earlier. Self-employment was also little changed in March, up 81,000 (+3.0%) on a year-over-year basis.

Economists expected the trade war to weigh on the Canadian labour market in March. Market participants expected zero employment gains as steel & aluminum tariffs hit jobs in the sector. While we haven’t seen broad-based layoffs yet, automaker Stellantis NV temporarily halted production at assembly plants in Windsor, ON and Mexico, laying off 3,200 people in Canada, 2,600 in Mexico and 900 at six U.S. factories. The pressure from those and broader non-USMCA-compliant tariffs was expected to drive stagnant job growth in the month. At 6.7%, the jobless rate met expectations, still two ticks shy of November’s cycle high.

Employment could experience a further downside over the coming months, depending on how the tariff backdrop evolves. Average hours worked could see an even bigger hit as work-sharing programs come into effect due to pressure on manufacturing production.

The unemployment rate rose 0.1 percentage points to 6.7% in March, the first increase since November 2024. It had trended up from 5.0% in March 2023 to a recent high of 6.9% in November 2024 before falling by 0.3 percentage points from November 2024 to January 2025 in the context of robust employment growth at the end of 2024 and in early 2025.

Since March 2024, the unemployment rate has remained above its pre-COVID-19 pandemic average of 6.0% (from 2017 to 2019).

In total, 1.5 million people were unemployed in March, up 36,000 (+2.5%) in the month and up 167,000 (+12.4%) year over year.

Among those unemployed in February, 14.7% became employed in March. This was lower than the corresponding proportion in March 2024 (18.6%) (not seasonally adjusted).

Long-term unemployment has also risen; the proportion of unemployed people searching for work for 27 weeks or more stood at 23.7% in March 2025, up from 18.3% in March 2024.

Total hours worked rose 0.4% in March, following a decline of 1.3% in February. On a year-over-year basis, total hours worked were up 1.2%.

Average hourly wages among employees were up 3.6% (+$1.24 to $36.05) year over year in March, following growth of 3.8% in February (not seasonally adjusted).

Wholesale and retail trade employment fell by 29,000 (-1.0 %) in March, partly offsetting an increase of 51,000 in February. On a year-over-year basis, the number of people working in wholesale and retail trade was little changed in March.

Employment declines led by wholesale and retail trade in March

Following five months of little change, employment in information, culture, and recreation decreased by 20,000 (-2.4%) in March. Despite the decline, employment in this industry changed little on a year-over-year basis.

In March, employment also fell in agriculture (-9,300; -3.9%), while there were gains in “other services” (such as personal and repair services) (+12,000; +1.5%) and in utilities (+4,200; +2.8%).

Bottom Line

US employment data for March were also released this morning. In direct contrast to Canada, US job growth beat forecasts in March, and the unemployment rate edged up, pointing to a healthy labour market before the global economy gets hit by widespread tariffs.

Canada’s job market stalled in March, shedding the most jobs in over three years. The job loss was the first in eight months, with trade-exposed sectors driving some declines.

The threats and implementation of US President Donald Trump’s tariffs and Canada’s retaliating levies have weighed on the Canadian jobs market over the past two months. However, with the country dodging the latest round of so-called reciprocal tariffs this week, the Bank of Canada may have more time to weigh economic weakness against rising price pressures.

Stocks have fallen the most since March 2020–the beginning of Covid, and bonds are rallying causing market-driven interest rates to drop precipitously. The Bank of Canada meets again on April 16. The day before, Canadian inflation data for March will be released. This will be a crucial report as the central bank assesses the tug-of-war between tariff-induced inflation and unemployment. Currently, traders are betting there is only a 33% chance of a 25 bps rate cut later this month. While the BoC might take a pass this month, the coming slowdown in the Canadian economy will warrant rate cuts in June, if not sooner.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca