OTTAWA — The head of the Bank of Canada has signalled a shift in how the central bank sets its benchmark interest rate at a time when tariff uncertainty with the United States has made long-term forecasting much more difficult.
Governor Tiff Macklem also acknowledged a recession is in the cards for Canada amid the trade war, which escalated on new fronts Thursday thanks to a new round of tariffs from China.
Macklem was in Calgary on Thursday speaking to the city's economic development group.
The Canadian economy was in a strong position at the start of 2025 as inflation was under control and growth was picking up, spurring hope Canada had avoided a recession, he said in his speech.
“The Canadian economy managed a soft landing. Unfortunately, we’re not going to stay on the tarmac for long,” Macklem said.
That’s largely because of sweeping tariffs imposed by the United States earlier this month, as well as the Canadian response to impose import taxes on billions of dollars in U.S. goods.
Depending on how long those tariffs are kept in place, the "damage" that Macklem said is already starting on both sides of the border could put that soft landing in jeopardy.
“If you get broad-based tariffs for a long time, yes, that could very well lead to a recession," he told reporters after his speech on Thursday.
Tariffs have been imposed and changed multiple times so far this month, and it’s not fully clear where U.S. President Donald Trump will take the trade dispute next, though he has threatened a round of “reciprocal” tariffs is coming on April 2.
Because of that uncertainty, Macklem signalled a shift to how the central bank will approach the economic forecasts it uses to decide where to take its policy rate, which sits at 2.75 per cent after seven consecutive cuts.
On April 16, the Bank of Canada is set to make its next interest rate decision and release a new monetary policy report with forecasts for inflation and the economy.
Macklem signalled Thursday that next month's report might not come with a "single, central projection" for the economy, instead including a range of scenarios based on how tariff uncertainty unfolds.
He has warned in the past that the Bank of Canada's tool box isn't well-suited to tackle both higher inflation and a weakening economy.
Macklem said monetary policymakers are going to shift their focus more towards setting a benchmark interest rate that’s better suited for the range of risks facing Canada, instead of what the central bank thinks is the most likely path forward for the economy.
By doing so, the central bank can avoid choosing one path and risk getting that forecast, and the related needs of monetary policy, very wrong.
The Bank of Canada will need to be “flexible and adaptable,” Macklem said, in order to react quickly to new developments on the tariff front.
“We need to set policy that minimizes the risk,” he said in his speech. “That means being less forward-looking than normal until the situation is clearer. And it may mean acting quickly when things crystallize.”
Macklem clarified to reporters later that his message to Canadians is not that they should necessarily expect interest rate announcements to come in between the Bank of Canada's scheduled decisions — an action the central bank took during the uncertain onset of the COVID-19 pandemic in 2020.
Thursday also marked the first day of a new wave of tariffs from China targeting Canadian agricultural goods, a response to import taxes on electric vehicles levied by Canada in October.
Macklem said Canada is "squeezed" by its tariff conflicts with the U.S. and China and that will have an impact on the Canadian economy.
But he said those changes also fit into a broader shift in global trade.
“We’ve had a long period where all of our economies have benefitted from the tailwinds from peace, from globalization, from increasing integration," he said.
“Unfortunately, those tailwinds have all turned into headwinds.”
Macklem added that countries across the globe would benefit from a return to open trade, though rising economic security concerns would likely make undoing the latest shifts difficult.
“We probably can’t simply go back to where we were. But tit-for-tat tariff escalation, an escalating global trade war, is in nobody's interest," he said.
Macklem’s speech comes days after Statistics Canada reported that inflation jumped up to 2.6 per cent in February, largely thanks to the end of Ottawa’s two-month GST break.
It’s unclear how quickly businesses will pass on the higher costs of tariffs to customers, Macklem noted, so the Bank of Canada has prepared multiple scenarios.
In one possibility, where broad tariffs see costs rapidly passed through over the course of a year, inflation rises roughly 2.25 percentage points higher in the first quarter of 2026 than it would have without the trade war. The Bank of Canada’s January projections had inflation averaging to 2.1 per cent through 2026, before the impact of tariffs.
The example projecting a rapid rise in prices would see the one-time hit to inflation tied to tariffs unwind sooner, however, almost fully fading from the forecast by the end of 2027.
Other scenarios that see a more gradual pass-through of higher prices mean the inflationary hit would never rise as high as in the first case study, but would stay for longer.
This report by The Canadian Press was first published March 20, 2025.
Craig Lord, The Canadian Press
