Highlights
The Bank of Canada published its latest Monetary Policy Report, with uncertainty related to U.S. trade policy continuing to cloud the outlook for the Canadian economy.
That being said, the MPR highlighted a narrowing of trade policy outcomes, with the risk of very high tariffs having receded. But the chances of an open-trade scenario with low or no tariffs have literally vanished.
In the current scenario, Canada and China retaliatory tariffs are assumed to be permanent, while other countries are assumed to not retaliate, fostering high uncertainty into next year. After a decline in the second quarter of 2025, Canada's GDP grows by about 1 percent in the second half of this year, with exports stabilizing and household spending recovering. GDP growth accelerates to 1.8 percent in 2027. Inflation remains close to 2 percent over the forecasting horizon.
Under its de-escalation scenario, the BoC expects Canada and other countries to remove their retaliatory tariffs, and uncertainty decreases. GDP growth rebounds faster and inflation is expected to remain below the 2% target until late 2026. Inflation would average around 2 percent in 2027.
By contrast, under the escalation scenario, Canada and China double the value of U.S. goods subject to retaliatory tariffs, with other countries also increasing their tariffs on the U.S. Uncertainty remains the same as it is today. Under this scenario, growth contracts through the end of 2025. CPI inflation is projected to peak at just above 2.5% in the third quarter of 2026, before receding to around 2 percent in 2027.
In all three scenarios, the neutral nominal rate is assumed to be between 2.25 percent and 3.25 percent.
That being said, the MPR highlighted a narrowing of trade policy outcomes, with the risk of very high tariffs having receded. But the chances of an open-trade scenario with low or no tariffs have literally vanished.
In the current scenario, Canada and China retaliatory tariffs are assumed to be permanent, while other countries are assumed to not retaliate, fostering high uncertainty into next year. After a decline in the second quarter of 2025, Canada's GDP grows by about 1 percent in the second half of this year, with exports stabilizing and household spending recovering. GDP growth accelerates to 1.8 percent in 2027. Inflation remains close to 2 percent over the forecasting horizon.
Under its de-escalation scenario, the BoC expects Canada and other countries to remove their retaliatory tariffs, and uncertainty decreases. GDP growth rebounds faster and inflation is expected to remain below the 2% target until late 2026. Inflation would average around 2 percent in 2027.
By contrast, under the escalation scenario, Canada and China double the value of U.S. goods subject to retaliatory tariffs, with other countries also increasing their tariffs on the U.S. Uncertainty remains the same as it is today. Under this scenario, growth contracts through the end of 2025. CPI inflation is projected to peak at just above 2.5% in the third quarter of 2026, before receding to around 2 percent in 2027.
In all three scenarios, the neutral nominal rate is assumed to be between 2.25 percent and 3.25 percent.
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.
