The Bank of Canada, as expected in the Econoday consensus forecast, left its target interest rate unchanged at 2.75 percent, as the central bank adopts a more cautious posture in the face of heightened risks to both its inflation mandate and the Canadian economic from the punitive tariffs imposed by the United States on Canadian imports.

"The major shift in direction of US trade policy and the unpredictability of tariffs have increased uncertainty, diminished prospects for economic growth, and raised inflation expectations, the BoC statement said.

In a new addition to the statement, the central bank said it will proceed carefully, with 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, it added.

The BoC noted that the tariff announcements and uncertainty are already a drag on both consumer and business confidence, which in turn is slowing down economic activity. Consumption, residential investment and business spending all look to have weakened in the first quarter, it said.

Meanwhile the trade tensions are also having a negative spillover effect in the labor market. Employment declined in March and businesses are reporting plans to slow their hiring, the statement said, adding, [w]age growth continues to show signs of moderation.

Starting this month, the BoC predicts that consumer price inflation will decelerate for one year due to 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, it added, and the extent to which this happens will depend on the evolution of tariffs and how quickly businesses pass on higher costs to consumers.

Short-term inflation expectations have risen, with higher costs expected from trade conflict and supply chain disruptions, while longer-term inflation expectations are little changed.

Monetary policy cannot offset the impacts of a trade war, the central bank said. What it can and must do is ensure that higher prices do not lead to ongoing inflation.

Governing Council will be carefully assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs, the statement said.

The consensus expects no action this time from the BOC after 225 basis points in cuts over the last seven meetings. The minority view cites tariff fallout in predicting another 25 bp. The majority says the BOC has already implemented 50 bp in cuts to cushion the tariff blow when it ordinarily would not have acted, given the data. CPI figures due the day before the BOC meets could affect the outcome too.

Canada's central bank, the Bank of Canada (BoC), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the overnight rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) within a 1 percent to 3 percent range and close to the 2 percent midpoint over the longer-run. To this end, the BoC also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.

Bank of Canada determines interest rate policy at eight meetings during the year and they are an influential event for the markets. Prior to each meeting, market participants speculate about the possibility of an interest rate change. A post-meeting statement is issued after each meeting. Unlike the Federal Reserve, there are no post-meeting minutes. The Bank has an inflation target range of 1 percent to 3 percent with specific focus on the 2 percent midpoint.

Although the Bank monitors many economic indicators, as indeed all central banks do, the Bank converted its inflation barometer for operational purposes to a consumer price index measure that subtracts eight volatile components to better reflect core inflation. It also takes the foreign exchange rate for the Canadian dollar into its monetary policy decisions.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The inflation control target is at the heart of Canadian monetary policy that the Bank and the Government have established. The level of interest rates and the exchange rate determine the monetary environment in which the Canadian economy operates.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.