Highlights
The Bank of Canada published its latest 'Monetary Policy Report' and - since the last report published in January the trade war with the United States has intensified, which is expected to slow down economic growth and apply upward pressure on prices.
Looking ahead, the central bank sees two possible scenarios for the Canadian economy, although it warns that [g]iven the unprecedented shift in the direction of U.S. trade policy, there is considerable uncertainty about how tariffs could impact the economy. The degree to which prices will rise and economic activity will weaken is unclear.
Under the first one, unpredictable trade policy is a drag on economic activity. GDP growth stalls briefly in the second quarter of 2025 and then averages around 1.6 percent through the end of 2027, resulting in persistent excess supply.
The inflation rate falls below the BoC's target to average about 1.5 percent for the rest of 2025 and in early 2026 due to both excess supply in the economy and the removal of the consumer carbon tax despite the upward pressure on prices from the few remaining tariffs. Inflation then averages around 2 percent for the rest of the scenario horizon.
Under the second scenario, economic activity in Canada contracts over the next year averaging about -1.2 percent due to tariffs and the adverse effects of uncertainty on consumers and businesses. GDP growth then gradually rebounds to around 1.8 percent in 2027.
Consumer price inflation averages close to 2 percent through the first quarter of 2026, as the removal of the consumer carbon tax and ongoing economic slack roughly offset the impact of tariffs. Inflation then increases above 3 percent in the second quarter of 2026 due to the impact of tariffs, before falling back to the 2 percent target in 2027.
Looking ahead, the central bank sees two possible scenarios for the Canadian economy, although it warns that [g]iven the unprecedented shift in the direction of U.S. trade policy, there is considerable uncertainty about how tariffs could impact the economy. The degree to which prices will rise and economic activity will weaken is unclear.
Under the first one, unpredictable trade policy is a drag on economic activity. GDP growth stalls briefly in the second quarter of 2025 and then averages around 1.6 percent through the end of 2027, resulting in persistent excess supply.
The inflation rate falls below the BoC's target to average about 1.5 percent for the rest of 2025 and in early 2026 due to both excess supply in the economy and the removal of the consumer carbon tax despite the upward pressure on prices from the few remaining tariffs. Inflation then averages around 2 percent for the rest of the scenario horizon.
Under the second scenario, economic activity in Canada contracts over the next year averaging about -1.2 percent due to tariffs and the adverse effects of uncertainty on consumers and businesses. GDP growth then gradually rebounds to around 1.8 percent in 2027.
Consumer price inflation averages close to 2 percent through the first quarter of 2026, as the removal of the consumer carbon tax and ongoing economic slack roughly offset the impact of tariffs. Inflation then increases above 3 percent in the second quarter of 2026 due to the impact of tariffs, before falling back to the 2 percent target in 2027.
Definition
Since 2009 the Bank of Canada (BoC) has regularly updated its economic view via a quarterly Monetary Policy Report. This presents base-case projections for inflation and growth in the Canadian economy as well as an assessment of the risks. The forecast provides a platform upon which the monetary authority can base its decisions with regards to any changes in official interest rates (and/or unconventional monetary instruments).
Description
Each quarter, the MPR gives the financial markets a view of the BoC's governing council thinking. This provides important guidance especially since the BoC does not publish minutes from its policy setting meetings. The report is released at the same time as the policy announcement is made.
