‘Confused’: Bank of Canada facing calls it should have cut amid inflation, growth risks

Discussing Bank of Canada's decision to hold the key interest rate at 2.75 per cent.

Some experts are calling into question the Bank of Canada’s decision to hold its key policy rate amid trade uncertainty, as the central bank faces dual risks from downside economic impacts coupled with higher inflation expectations.

The Bank of Canada announced Wednesday that it would leave its benchmark interest rate unchanged, waiting for a clearer picture of how trade uncertainty will affect the economy. The policy rate remained at 2.75 per cent following seven consecutive cuts since June. Going into the central bank’s decision, a slight majority of economists tracked by Bloomberg expected a rate hold, with the rest expecting a 25-basis point cut.

“I’m honestly kind of confused at the decision today. I understand there is a lot of uncertainty (and) we want to wait and see how things evolve,” Citi Economist Veronica Clark said in a panel discussion on BNN Bloomberg Wednesday.

The central bank also issued two economic forecasts, one with a scenario where tariffs are negotiated away quickly and the economy stalls but faces limited damage, with inflation easing to around 1.5 per cent for most of the year. Under the other scenario, Canada enters into a year-long recession due to a more protracted global trade war, with inflation reaching above three per cent in 2026.

“The Bank of Canada outlined two possible scenarios for this year and maybe reality falls somewhere in the middle, but both of them had softer growth and below-target inflation for the year,” Clark said.

“It seems strange to me that neutral policy rate is going to be the right setting in that kind of environment, and I think officials would probably see it similarly and if they think that rates should be lower at some point, I don’t know why they wouldn’t have done that today, but we’ll wait and see how things evolve.”

‘Difficult position’

Dominique Lapointe, senior director in macro strategy at Manulife Investment Management, said in the panel discussion that he and his team were “slightly surprised” with the decision and expected a reduction in borrowing costs.

“They decided to hold, so to us it tells us that the Bank of Canada is equally weighting, at this point, the downside risk to growth against the upside risk to inflation. I think it’s a very difficult positions to be in because we already have signs that the Canadian economy is weakening, the labour market is faltering quite quickly. But at the same time, businesses are telling us that yes, they will raise prices at least partially to offset those tariffs,” he said.

Lapointe said the central bank may be waiting to see which issue comes first, either downside risks to growth or higher inflation, while highlighting the possibility that tariffs are removed.

“If that’s the case, I think they’re concerned about overcutting, assuming that maybe the tariffs are going to get removed,” he said.

Martin Cobb, senior vice-president of equities at Lorne Steinberg Wealth Management, said in the panel discussion that he agreed the Bank of Canada shouldn’t have held its policy rate, describing a cut as an “insurance policy option.”

“I’ve said before, tariffs may raise (the) headline inflation rate, but ultimately, they will exert a deflationary force on top of a weakening housing market (and) higher interest rates. There’s a lot of pressure on the Canadian economy. They’ll cut rates probably in June and continue to cut over the rest of the year, in my view,” he said.

Bipan Rai, managing director and head of ETF and alternatives strategy at BMO Global Asset Management, told BNN Bloomberg Wednesday that the central bank’s decision was “not so much of a surprise.” He said it was a close call whether the central bank would cut or not, but he suspects policymakers are “paying a little more tribute” to rising inflation expectations.

Ed Devlin, the founder of Devlin Capital and a senior fellow at the C.D. Howe Institute, told BNN Bloomberg Wednesday that the bond market had expected the rate decision to be a “coin toss” and “it turned out to be a coin toss.”