There will be no cut in the Bank of Canada's key lending rate this time.
After cutting its overnight rate seven times, the Bank opted to hold it steady at 2.75 per cent. The deposit rate remains at 2.7 per cent, and the bank rate at three per cent.
The Bank blames the shift in U.S. trade policy and the unpredictability of tariffs. It said the unprecedented spat with the Americans has increased uncertainty, diminished prospects for economic growth, and raised inflation expectations.
It focused on two scenarios. In the first, uncertainty is high, but tariffs are limited. The Bank said that would weaken growth temporarily, but inflation would remain near the two per cent target. The second focused on a protracted trade war. If that's the case, it predicts a recession in Canada this year and inflation to rise above three per cent next year.
Pervasive uncertainty makes it difficult for the Bank to forecast Gross Domestic Product growth and inflation. U.S. President Donald Trump's on-again off-again tariff announcements have roiled financial markets, and oil prices have dropped substantially since January.
Already, the Canadian economy is slowing as the trade war lowers both consumer and business confidence. Employment declined in March, while consumption, business investment, and residential investment all slipped in the first quarter. Wage growth shows signs of moderation, and trade tensions are disrupting Canada's labour market recovery.
Tariffs have also weakened the global economic outlook.
The U.S. economy is also slowing. So is China's. In the European Union, growth was modest early this year and could continue to weaken, especially in manufacturing.
The Bank's Governing Council said it'll proceed cautiously, paying particular attention to the risks and uncertainties facing the national economy.
The next scheduled rate announcement is June 4.
